New Zealand holds rates, keeps tightening bias

New Zealand's central bank held interest rates steady as expected on Thursday but surprised some by reaffirming plans to raise them when, and if, the global economic outlook improves. The Reserve Bank of New Zealand (RBNZ) said that it was ready to increase rates to fight inflation when global risks subside, though it also noted the domestic economy was growing at only a modest pace.
"Given the ongoing global economic and financial risks, it remains prudent to continue to keep the OCR (official cash rate) on hold at 2.5 percent for now," RBNZ Governor Alan Bollard said in a brief statement. "However, if global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require future OCR increases," he added.
That was broadly in line with the bank's comment last month, when growing global uncertainty prompted it to keep the official cash rate (OCR) at record low 2.5 percent even as the local economy has shown signs of recovery. The rate has been held there since an "insurance" 50 basis-point cut in March to cushion the economy from the devastating Christchurch earthquake on February 22.
The New Zealand dollar gained around two-thirds of a cent to touch $0.8007, from $0.7936 before the statement. Debt futures fell up to 5 basis points as some investors had thought the bank would drop its tightening bias given the scale of uncertainty over Europe and the global outlook. Just this week the Bank of Canada abandoned all talk of an eventual tightening and sharply cut its economic outlook.
"The timing of this is still up in the air, with a mid-2012 timeframe as opposed to anything earlier looking most likely," said ANZ-National chief economist Cameron Bagrie. A Reuters poll taken right after Thursday's decision has nine of 16 analysts expecting the first RBNZ rate move in April or June of 2012, compared to nine expecting a March start before the statement. Since last month's rate review, domestic data has been less encouraging, with economic growth, consumer spending and housing indicators pointing to slowing momentum.
"Domestic activity has continued to expand at only a modest pace despite relatively strong commodity prices," Bollard said. Annual inflation slowed to 4.6 percent in the September quarter, from a 21-year peak of 5.3 percent, and will most likely return to the RBNZ's 1-3 percent target band this quarter when the impact from a higher sales tax rise drops out.
It said underlying inflation was settling near 2 percent. Business and consumer confidence have also retreated in recent months, while inflation expectations have eased. Data last month showed the economy barely grew in the second quarter, after robust 0.9 percent growth in the first three months.