Greenspan will follow powerful New Zealand Central Bank.
Will this cause MO(momentum) to "pressure" stocks as investors
feel equities for higher yielding bonds.
Inquiring Minds want to know???
Or should it be Enquiring Minds?
New Zealand Central Bank Raises Benchmark
Interest Rate to 5.25% from 5%
By Victoria Batchelor
N.Z. Economy: Prices Low, Central Bank Raises Rates (Update2)
(Adds company comment and economists' quotes from 7th
paragraph through end)
Wellington, Jan. 19 (Bloomberg) -- New Zealand's central bank
raised its benchmark interest rate a quarter point, moving sooner
than expected to keep inflation low in the face of strong domestic
and global economic growth.
The bank raised its rate for overnight lending by banks to
5.25 percent from 5 percent. Economists surveyed by Bloomberg News
forecast the Reserve Bank would keep rates unchanged, saying they
expected the move at the quarterly economic review March 15.
New Zealand's consumer index of stocks fell 0.7 percent,
while the dollar initially rose and 10-year bond yields gained to
32-month highs after the rate increase.
The bank's move came less than two hours before Statistics
New Zealand said consumer prices -- the key measure of inflation -
- rose 0.2 percent in the fourth quarter, below expectations.
Inflation for all of 1999 averaged 1.3 percent, within the central
bank's 0-to-3 percent target band.
Question of Timing
``They may have moved a bit too early,' said John Gallacher,
chief economist at Ord Minnett Securities. ``The CPI figures are
telling us competitive pressures are keeping a lid on inflation.
Raising interest rates too quickly may cause a hard landing for
the economy.'
Today's move, prompted by strong quarterly economic growth
and the best consumer confidence in three years, follows a 50-
basis-point increase Nov. 17. At that time, the central bank said
it expected to raise rates further over the next two years.
``The rate rise is going to have some damping effect of sales
of big-ticket items,' said Trever Douthett, joint chief executive
of LV Martin & Son Ltd., a nationwide home appliance and
electronic goods retailer. Douthett said he didn't expect a
``substantial downturn in retailing, adding, ``Rate rises this
year have been well anticipated.'
The dollar rose as high as 52.20 U.S. cents after the bank's
statement from 51.82 U.S. cents immediately prior, before dropping
to 51.63 U.S. cents. The 10-year bond yield rose to a 32-month
high of 7.60 percent, from 7.58 percent before the bank's
announcement. It recently was quoted at 7.57 percent.
Stocks fell, with the benchmark Top 40 Index down as much as
0.7 percent.
Avoiding Inflation
``To avoid inflation pressures building, the Reserve Bank
needs to ease back on the degree to which monetary policy is
stimulating the economy,' the bank's governor, Don Brash, said.
``Strong growth is gradually using up spare capacity in the
economy.'
There's certainly signs the economy is growing apace.
Third-quarter gross domestic product rose 2.3 percent, the
fastest quarterly pace of growth in more than 15 years and higher
than the central bank's forecast of 1.3 percent.
Also, fourth-quarter consumer confidence surged to a three-
year high. Retailers, enjoying strong sales, are optimistic that
rate rise isn't likely to see the economy grind to a halt.
``It should be a very good year for everyone,' said Brent
Waldron, chief financial officer at Warehouse Group Ltd., New
Zealand's largest discount retailer. ``We all know interest rates
are on the way up, but it should be a while before that cuts into
people's discretionary spending.'
Inflation Low
The signs suggest inflation is tame. Consumer prices rose 0.2
percent in the fourth quarter, with economists picking a 0.7
percent rise and the central bank was tipping a 0.9 percent gain.
``It's pretty competitive out there. Our core strategy is to
put pressure on competitors by reducing prices where we can,'
said Warehouse's Waldron.
LV Martin's Douthett also said there's few signs inflation is
building.
``In terms of stronger world growth boosting prices (as the
Reserve Bank fears), we're not seeing any of that at all,' he
said. ``And we would tend to get a feel if that was in train as we
import a lot of goods.'
Finance Minister Michael Cullen joined the chorus of those
questioning the need for a rate increase now.
Cullen said it was a ``little strange' the bank raised rates
just hours before the CPI report; he said he will talk to monetary
officials about inaccuracy of the central bank's inflation
forecasts, saying they should ``necessarily assume inflationary
pressures are there when the published figures are showing that
they are not.'
In his statement, Brash said the central bank was targeting
inflation one to two years ahead.
``Twelve months ago they started to raise rates saying that
inflation was in the pipeline -- 12 months later and there's still
no sign of inflation,' said Stu Nattrass, head of foreign
exchange sales at WestpacTrust in Sydney.
The bank reviews interest rates about every six weeks and
releases a more comprehensive report on the economy and interest
rates about four times a year. The next so-called Monetary Policy
Statement is due March 15. The bank has said it prefers to make
rate changes at quarterly statements.
Further Rate Rises
Most economists expect at least an additional 25-basis-point
rate increase at March statement. On Feb. 2, the U.S. Federal
Reserve's open market committee meets to decide U.S. interest rate
policy, while the central bank of Australia --New Zealand's
largest trading partner -- meets Feb. 1.
``They know the Federal Reserve and the Reserve Bank of
Australia will most likely move early February and the adverse
move in interest rate differentials could put pressure on the New
Zealand dollar,' said Brian Redican, economist at Macquarie Bank
Ltd. in Sydney. ``There was not another opportunity to move again
until March.'
Some economists said the while the move was sooner than
expected, it's warranted.
``Like other central banks, the Reserve Bank wants to be pre-
emptive on inflation. It's clear the economy is recovering,' said
Stephen Halmarick, economist at Salomon Smith Barney and Citibank
in Sydney.
``I don't think a quarter-point move is very aggressive,'
Halmarick said. ``I still see the cash rate at 6 percent by mid-
year.' |
