Weekly Outlook: Kiwi Looks Ahead To Rate Decision

Although Reserve Bank Governor Bollard had said recently that he would like to raise interest rates again as a means to keep inflation in check, the economy simply is not performing well enough right now to absorb the negative effects that another rate rise would produce. Therefore, the word on the street is that rates will be held at 6.75 percent, with all 13 economists surveyed by Bloomberg predicting that rates will stay the same. Bollard is required to keep inflation in New Zealand between 1 and 3 percent. Although price increases have been on the higher side of that target for the past few months, in recent surveys fewer companies have indicated that they are looking to raise prices further. Thus, many economists feel that inflation will peak at its current 3.1 percent yearly rate and that further tightening measures are not necessary.      

This week, New Zealand saw the release of some very disappointing economic data; solidifying speculation that the economy is slowing markedly. Credit lending fell 2.9 percent in April after increasing 0.9 a month prior. Along with this, business confidence and building permits plunged 56.7 percent and 33.9 percent respectively. As business outlook slumped to a seven year low, market concerns are beginning to brew. Although Reserve Bank Governor Bollard stated on April 28th that he may raise interest rates for the eight time since January 2004 to keep inflation in check, the most recent releases show that the economy will exhibit little growth this year. Businesses are felling the burden of the high 6.75 percent benchmark rate, with fewer companies saying that they will invest more in plants, equipment and buildings. Construction businesses are being hit the hardest, as demand for houses and buildings are on a steep decline. Furthermore, according to the most recent surveys, fewer companies predicted that their profits will increase in 2005 and more than a third of businesses felt that their profits will probably decline this year. The revised number for New Zealand’s trade deficit was also released this week, showing that the annual amount widened more than originally expected. The gap grew to NZ$4.32 billion due to weaker exports than first predicted. However, exports did rise 8.3 percent from a year earlier in April, mostly on increased demand for agricultural products in Australia and China.