WELLINGTON: An outperforming economy is expected to prompt New Zealand's central bank to raise interest rates to a three-year high this week, but a strong currency and early signs of cooling inflation pressures may slow the pace of further tightening.
All 17 economists polled by Reuters expect the Reserve Bank of New Zealand will lift its official lending rate by 25 basis points to 3.0 percent at its Official Cash Rate review on Thursday as it seeks to contain inflation.
Markets have priced in a 97 percent chance of a rate rise, following a 25-basis-point hike in March, when the RBNZ became the first central bank among developed countries to tighten policy in the current cycle.
A hike would take official rates to their highest since January 2011 as post-earthquake reconstruction projects in the Canterbury region, a booming housing market and increasing migration continue to boost the economy.
The RBNZ expects growth of 3.0 percent this year, up from 2.3 percent in 2013.
But a sedate reading of consumer price inflation last week suggested that the RBNZ may be less aggressive in raising rates this year, after indicating in March that it may lift by as much as 125 basis points by year-end. JPMorgan economist Ben Jarman said tame inflation would keep rates from rising beyond 3.25 percent by year end, while adding that a weakening terms of trade and a strong currency may also temper the central bank's tightening cycle.
"We're getting a bit of a divergence in the currency versus the direction of the terms of trade, and were that diversion to widen out even more, that puts pressure on the policy rate, it makes it harder to justify further tightening," he said.
Investors will closely scrutinise the RBNZ's brief statement which will accompany Thursday's decision for any indications of the central bank's rate outlook.
Governor Graeme Wheeler will not address reporters following the announcement.
According to the Reuters poll, 14 economists expect the RBNZ will follow up Thursday's hike with more tightening in June, while three, including JPMorgan, expect it will wait until July before raising again.
LOWER DAIRY PRICES
Last month, the RBNZ warned that it expected inflation pressures to persist over the next two years, adding that the scope of rate rises would depend on economic data and emerging price risks.
Data last week showed that annual inflation rose 1.5 percent in the first quarter, below the RBNZ's target mid-point around 2 percent, bolstering the market's view that further rises will be gradual.
In addition, a rapid fall in global prices for dairy products, New Zealand's major export product, may prevent the central bank from stepping on the monetary policy brakes too hard.
Global dairy prices have plunged 19 percent since the start of 2014, coming off a record high hit a year ago as developing countries better manage growing demand for milk products.
Meanwhile, the New Zealand dollar has rallied in the aftermath of the RBNZ's rate rise, pushing its trade-weighted index to a post-float high around 81.00 earlier this month.
Lower imported price pressures resulting from a continuously strong "kiwi" dollar may curb the need to take rates to 3.75 percent by year-end, the median rate in the Reuters poll. Many market participants believe the kiwi has peaked, and that it will retre
at towards $0.8000 versus the US dollar later this year, when an end to the Federal Reserve's asset-buying programme and a possible rate rise in Australia dims the kiwi's rate appeal.
Such a level remains historically high, but some economists believe a fall of that size may be enough for the RBNZ to maintain its hawkish rate outlook.
"The case is building for downside in the New Zealand dollar in time as a result of lower commodity prices and terms of trade," said Bevan Graham, chief economist at AMP Capital New Zealand, adding that he expected rates to rise to 3.75 percent by year-end.
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