NZ Interest Rates Remain Unchanged

New Zealand’s central bank has kept its official interest rate steady at 7.25 percent despite slowing economic growth, citing a worse-than-expected outlook for inflation.

Rising oil prices and a declining New Zealand dollar (NZD) is expected to see inflation rise to 3.9 percent this quarter, Reserve Bank governor Alan Bollard said. Earlier forecasts had seen inflation peaking at 3.4 percent.

The central bank has a mandate to keep inflation within a band between one and three percent over the medium term.

Bollard said that given the unavoidable nature of the oil price rises, it would be inappropriate to raise interest rates in response.
“We do not expect to tighten policy in response to the high headline inflation in the short term,” Bollard said.
“But equally, we cannot afford to ease policy until we have more certainty that future inflation outcomes will be trading down comfortably below three percent.”

The central bank expects inflation to remain above three percent well into next year.
Reiterating comments made earlier in the year, Bollard said he did not expect to lower interest rates this year despite the rapid slowing of the economy.

Economic growth is expected to slow to 1.6 percent in the year to March 2007, before rising to 2.7 percent the following year.
“Export growth will recover as a result of the lower exchange rate and buoyant demand in world markets,” Bollard said.
“At the same time, household spending will be constrained by a continued weakening in the housing market, high petrol prices and a slowdown in employment growth.”

Many economists had been predicting a cut in the official rate later this year despite repeated indications to the contrary by Bollard. But worsening inflation pressures and a more hawkish tone from Bollard on inflation are making some take a second look at those predictions.
Westpac Bank senior economist Nick Tuffley said the scenario of no rate cut this year was looking increasingly likely.

“The risks to our call for a cut in October are all skewed one way,” Tuffley said.
“However, the Reserve Bank risks overestimating both growth and inflation over the next year, and rate cuts are less distant than it perceives,” he said.

ANZ Bank economists agreed the higher inflation risk made a cut less likely before 2007 but added that any evidence of a sharp weakening of the economy later this year could leave scope for a cut.

“We continue to believe the Reserve Bank will have scope to cut the official rate by the end of the year although this will still require a huge leap of faith on the inflation front,” they said.
ANZ is expecting a relatively strong March quarter gross domestic product number — which is due on June 23 — but economic data will again turn weaker afterwards.

“We expect such a change in domestic data to once again turn the markets attention back to an easing theme sooner rather than later.”

The decision to leave interest rates unchanged was widely expected by financial markets.

SOURCE AFP