New Zealand leaves rates on hold


Agriculture is a key sector of the New Zealand economy

By CNN's Geoff Hiscock, Asia business editor

WELLINGTON, New Zealand (CNN) -- New Zealand's Reserve Bank left interest rates unchanged Wednesday, striking a balance between domestic economic strength and offshore risk.

New Zealand's official cash rate remains at 4.75 percent, a rate it set on November 14 when it cut rates by half a percentage point.

Analysts now expect the next rate move will be an increase, probably of a quarter of a percentage point, in the second half of 2002.

In neighboring Australia, where the benchmark interest rate is 4.25 percent, expectations of a possible rate cut in February all but vanished Wednesday with the release of higher than expected inflation figures.

The latest Australian consumer price index result of 0.9 percent for the December quarter was almost double market expectations. The Bureau of Statistics said this equated to 3.1 percent a year, above the central bank's 2 to 3 percent target band.

New Zealand Reserve Bank governor Don Brash said the decision to leave NZ rates on hold reflected a balancing of risks between a relatively buoyant domestic economy and continuing weakness offshore.

"As expected in November, growth in the economies of our trading partners has continued to be sluggish," Brash said.

Japan 'of particular concern'

CNN.com Asia

More news from our
Asia edition

"Notwithstanding a widespread expectation that a global recovery is imminent, there remains a material risk that the situation could deteriorate further. The outlook in Japan is of particular concern."

Brash also noted that commodity prices for New Zealand exports had fallen sharply and earlier than expected. New Zealand's economy relies heavily on exports of agricultural items including wool, meat, dairy products, fruit, vegetables and timber.

Japan is a key trade partner and a prime market for NZ goods.

Sydney-based HSBC senior economist Anthony Thompson said he expected New Zealand would keep rates on hold throughout the first half of the year, with the first rate rise of 25 basis points likely to be seen in the third quarter.

In his statement Wednesday, Brash said New Zealand had strong domestic economic activity.

"Consumer spending appears more buoyant than expected previously, and indications are that business investment is also holding up better than expected," he said.

Inflation on the move

"The housing market has strengthened in recent months, and the labor market continues to be relatively tight."

Brash said consumer price index inflation for the year to March 2002 was likely to be well above 2 per cent.

He warned this would become a concern if an increase in inflation expectations was reflected in price and wage setting.

Regional analyst IMA Asia is tipping economic growth of 2.3 percent in 2002 for New Zealand, rising to 4.2 percent in 2003. But its consumer price index outlook of 1.9 percent in 2002 is more moderate than the Reserve Bank's.

The New Zealand dollar has strengthened in recent weeks to about 43 U.S. cents. It hit a low of 39.75 U.S. cents in late September.