Finance & Business World

New Zealand’s central bank will need to respond to increasing inflation pressure and raise interest rates in March, according to the nation’s biggest non-government fund manager.

“The odds are building for an earlier tightening,” Jason Wong, head of investment strategy at AMP Capital Investors Ltd., told reporters in Wellington today. “Come March, when you’ve had another 8 percent increase in house prices and some positive GDP and retail sales data, we can’t see the Reserve Bank sitting on their hands at that point.”

Reserve Bank Governor Alan Bollard has held the official cash rate unchanged at a record-low 2.5 percent since April and said on Sept. 10 he didn’t expect to raise the benchmark until “the latter part” of 2010. Two of 11 economists surveyed by Bloomberg News expect he will increase the rate in March and nine say it will be higher by June 30.

House prices have gained 7.9 percent since a low point in January, according to Real Estate Institute figures.

Consumer prices rose more than expected in the third quarter while non-tradable inflation, a core measure of prices that are not influenced by currency fluctuations and fuel, gained 1 percent, according to the report published on Oct. 15.

“If I was Bollard I’d be starting to nudge rates higher even though the inflation outlook for the next 12 months is okay,” said Wong, who helps manage NZ$10.8 billion ($8 billion) of stocks, bonds and property. “You want to start to take away that upward pressure on the housing market.”

Currency Gains

Wong says it wouldn’t be appropriate to raise rates this year because the New Zealand dollar’s 37 percent gain against the U.S. dollar in the past six months will curb inflation over the next year. Bollard’s focus is on inflation in a two-to-three year period, he said.

Bollard should also remove indications that borrowing costs could be lower at the next review on Oct. 29.

“Indicating rates could fall is not credible so they need to change the tone a little bit,” Wong said.

New Zealand’s strengthening currency is affecting some exporters, while other companies are able to benefit because the cost of imported goods is reduced, Wong said. The currency rose to 75.76 U.S. cents today, nearing a 15-month high.

There is nothing to suggest the currency is going to suddenly reverse its gains, and it could move higher, he said. It reached a 23-year high of 81.3 cents in February 2008.

Commodity prices are supporting the New Zealand dollar while the U.S. dollar “has got a lot going against it,” Wong said. “Were the Australian dollar to go to parity, then clearly we are going to go above 80 cents.” The Australian dollar was trading at 92.95 U.S. cents at 1:40 p.m. in Sydney.

New Zealand companies, who for years were used to the local currency fluctuating above and below 60 U.S. cents, may have to get used to something higher, Wong said. “Seventy may be the new 60.”

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