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High NZ dollar gives Bollard more time to hike OCR

High NZ dollar gives Bollard more time to hike OCR as inflation stirs, NZIER says

By Jonathan Underhill

June 1 (BusinessDesk) – The Reserve Bank may lift its benchmark interest rate as much as 150 percentage points next year though the New Zealand dollar’s advance to a post-float high will help keep inflation at bay in 2011, the NZ Institute of Economic Research says.

Inflationary pressures are building because businesses have seen their margins slimmed down and will want to recoup some ground when the economy picks up pace – likely to begin in 2012 as the rebuild of Christchurch gains pace, according to the institute Quarterly Predictions report.

“The RBNZ will need to raise rates next year towards 4% to offset these inflationary pressures,” NZIER principal economist Shamubeel Eaqub said in a statement. “A high NZD is helping to keep a lid on inflation for now. We expect the NZD to remain elevated for some time,” he said.

The kiwi dollar jumped as high as 82.62 U.S. cents yesterday, after the National Bank Business Outlook showed business confidence rebounded this month, with more firms seeing profit growth and planning to raise prices.

That’s the highest since the kiwi was allowed to trade freely in March 1985 and comes amid reports New Zealand assets such as bonds are drawing Chinese interest. Offshore demand has helped the Debt Management Office sell $20 billion of debt this fiscal year.

Reserve Bank Governor Alan Bollard releases his latest review of monetary policy on June 9, and may use the occasion to make pointed comments on the inappropriately high dollar, some analysts say.

Eaqub expects Bollard to keep the OCR at 2.5% through this year. “As the recovery becomes apparent interest rates will have to rise to curb gathering inflation pressures,” he said.

The rebuild of Christchurch will propel gross domestic product to a 3.7% pace next year from 0.3% in 2011, Eaqub said. “The preconditions for a domestic recovery are strengthening,” he said.

The NZIER expects New Zealand’s economic recovery will be “gradual but sustainable” with households deleveraging, the DMO trimming back the size of its bond sales and the government putting a cap on budget spending. Excluding Christchurch, GDP growth may average 2% annually over the next few years, it said.

Eaqub said while the prospects for the domestic economy look more favourable, the global clouds have darkened somewhat. He cited Europe’s sovereign debt crisis, uncertainty about the end of the U.S. Federal Reserve’s quantitative easing programme, waning growth in emerging markets such as China and a slowing Australian housing market.

Australia and China are New Zealand’s two biggest export markets, accounting for $15.5 billion, or more than a third by value of the nation’s merchandise trade in the 12 months ended March 31.

“Export prices and volumes have been very strong over recent years and have provided a much needed offset against a deep domestic recession,” Eaqub said. “A slowdown in global growth would weigh on exports and hinder the broader recovery.”


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