UPDATE: Bollard holds OCR , no tightening before 2010 second-half

Thursday 10th September 2009

Reserve Bank of New Zealand Governor Alan Bollard held the official cash rate at 2.5% today, as expected, and said the strong kiwi dollar was a threat to a sustained recovery, ruling out a rates increase before the second half of 2010.

"Business profits are under pressure because of the low level of activity and the elevated New Zealand dollar," Bollard said in Wellington today.

"If the exchange rate was to continue its recent appreciation and/or the recovery in house prices were to undermine the improvement in household savings, then the sustainability of the present recovery will be brought into question."

He retained the bank's easing bias, saying there's still a chance rates will be cut again because of the fragility and uncertainty in the global economic recovery. Rates are likely to remain low until the second half of 2010, he said, reiterating comments from his last review.

The kiwi was little-changed at 69.68 US cents, from 69.56 cents immediately before the release, having initially dropped after the statement. The trade-weighted index was at 63.75 from 63.68 before the statement.

The central bank expects the TWI to average 62.60 in the December quarter, up from a previous forecast of 57.10. Bollard last intervened in the currency markets when the TWI rose above 70.

"This is bang-on what we expected," said the Bank of New Zealand's head of research, Stephen Toplis, who noted the RBNZ's track for the kiwi dollar now looked far more realistic than in its last MPS, by assuming the exchange rate would strengthen as growth kicked in.

"Things need to be even stronger than they are forecasting before they would raise interest rates. It would be a mistake to think that as growth gains momentum, the RB need to stomp on it straight away," Toplis said.

Bollard predicts the economy will climb out of recession in the third quarter, ending a six-quarter contraction that's slashed company earnings, eroded government tax revenue and driven up unemployment.

Still, the kiwi dollar's 41% surge from its lows in March is hampering the prospects for an export-led recovery and for the rebalancing in the economy away from debt-funded consumer spending and housing investment.

"While the volume of indicators pointing to a significant improvement in New Zealand's economy over the next 12 months is mounting, there remain a number of meaningful risks," said Mark Walton, economist at Bank of New Zealand, before the report.

"Not least (are) a troublesome NZD, an unbalanced growth profile and a still-uncertain global prognosis."

"The extent of recent New Zealand dollar strength appears to be a symptom of an almost indiscriminate rush back into risk-taking that has accompanied the recovery in global equity markets," Bollard said in the statement.

"Whatever explains the currency's strength, it is likely to lead to further deterioration in New Zealand external accounts, undermining the sustainability of the recovery."

Still, the central bank projected a pick-up in exports from the end of the year, and said the price for New Zealand's commodity prices had increased with dairy prices, in particular, climbing sharply from their lows in July.

A rise in net migration and a pick-up in the housing market underpinned the "patchy" recovery in the economy, but Bollard talked down the prospect of a bubble in the residential property market.

"An unusually low number of dwellings being offered for sale appear to have driven" the 4.4% increase in house prices, he said. Still, the threat of rising unemployment increase in building consent issuance should deter this trend, he said.

Unemployment is projected to peak at 7% next year. The property market was identified as a potential threat to household savings which could undermine the sustainability of an economic recovery. Economists say the central bank is unable to cut interest rates any lower for fear of sparking another property boom.

Bollard expects the contraction in annual average gross domestic product will hit the bottom in the September quarter at 2.4%, with the economy growing 0.1% in the period.

"For growth to be sustained in the medium term there is a need for improved competitiveness in the export sector and a continued recovery of household savings," he said.

Debt is expected to remain an issue for households as it continues to grow, albeit at a slower pace, according to the central bank.

The central bank forecasts the 90-day bank bill will remain at a quarterly rate of 2.8% until the September quarter next year, rising to 2.9% in the December quarter. The bank projects it will rise above 3% in 2011, and predicts it will return to 5% in 2012.

Inflation was "well within the target band," Bollard said. Still, the Reserve Bank pushed up its inflation forecast to 1.7% in the first half of next year, from 1.3% previously.

In a report last week, Bank of New Zealand chief economist Tony Alexander said the evidence of a turnaround in New Zealand's economy can't be ignored any longer. Still, with restraints on the dairy, tourism and commercial property sectors, "the upturn will not be a boom."

Yesterday, government data showed New Zealanders lifted purchases on credit and debit cards for a second month in August, stoking optimism that consumers are becoming more willing to spend amid signs the recession may be drawing to an end.

Last month, business confidence climbed to a net 34% of firms expecting conditions to improve in the coming year according to the National Bank Business Outlook, the third straight month where optimists outnumbered pessimists, while the latest Roy Morgan poll showed consumer confidence rose to a 17-month high.

Businesswire.co.nz

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