English Signals New Zealand Fiscal Tightening Lessens Need for Rate Rise
Bill English, New Zealand's finance and deputy prime minister. Photographer: Mark Coote/Bloomberg
“We are encouraged by the Reserve Bank governor who said a number of times that if fiscal policy carried more of the load then monetary policy wouldn’t have to carry as much,” Bill English, who also serves as deputy prime minister, said in an interview in his office in Wellington today. English added that the current exchange rate for the New Zealand dollar is an “impediment” for the country’s exports.
Traders today scaled back bets on the Reserve Bank of New Zealand to raise interest rates this year after a government report showed fewer jobs than forecast were generated in the fourth quarter. The one-year swap rate, a fixed payment made to receive floating rates, which is sensitive to interest-rate expectations, tumbled the most seven weeks, to 3.22 percent, compared with the RBNZ’s benchmark official cash rate of 3 percent.
New Zealand’s dollar has in the past half decade averaged a rate that’s effectively the strongest in three decades, English said. It’s traded at a mean of 69.30 U.S. cents over the past five years, compared with 57.19 cents the previous five. After his remarks were published, the currency known as the kiwi extended declines, trading at 77.13 cents as of 5:40 a.m. in London from 77.33 cents yesterday in New York.
Rising Unemployment
The jobless rate increased to 6.8 percent from 6.4 percent three months earlier, increasing the risk that the economy shrank for a second straight quarter in October to December. The median estimate of 10 economists surveyed by Bloomberg News was for a 6.5 percent rate.
“We can’t see a tightening before the September policy statement meeting and remain alert for the prospect that the next move in the cash rate could be down,” Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland, said in an e-mailed note after the employment report. “Based on the indicators available to date, we think that the economy probably contracted 0.4 percent in the fourth quarter.”
English said it will be up to “statisticians” to decide whether there was a recession. Growth has been hurt by losses in construction and retailing jobs as households start to boost saving, he said.
Warehouse Group Ltd., the nation’s largest discount retailer, last month forecast a decline in first-half profit after sales dropped.
Shift to Savings
“Consumers clearly remain even more focused than we predicted on strengthening household balance sheets,” Warehouse Chief Executive Officer Ian Morrice said in a statement.
The move to boost household savings and shrink the public deficit will help the economy shift away from reliance on consumers and the government, added English, 49, a former chief of the ruling party when it was in opposition.
Prime Minister John Key last week pledged to cut new spending this year, helping return the budget to surplus a year earlier than previously forecast. The government expects to achieve a surplus in the year ending June 30, 2015, Key said.
“What we need to do is ensure that government behavior isn’t putting upward pressure on interest or exchange rates,” English said in the interview in his office, in a wing of the New Zealand parliament known as the beehive for its appearance.
Looking at prospects for the kiwi in 2011, he said “it’s hard to see the general pressures that would push it up.”
Bollard’s Take
RBNZ Governor Alan Bollard told reporters on Jan. 28 that a faster elimination of the deficit “means less stimulus in the economy. And all other things being equal, which they never are, it means that one would be able to delay monetary policy tightening longer than would otherwise have been the case.”
New Zealand’s government has weathered the economic deterioration, with its popularity at 55 percent compared with the main opposition Labour Party at 29 percent, according to a Roy Morgan Research poll of 1,800 voters last month. Key yesterday called a general election for Nov. 26, saying the campaign will be about which party has a plan for jobs and income growth.
English indicated the biggest dangers for New Zealand include a slowdown in China, house-price bubble bursting in Australia or a spreading in the European sovereign-debt crisis.
“Commodity prices are starting to look like a spike,” he added. “If they can go up as sharply as they have in the last few months, they can come down.”
Dairy Rally
Milk prices are soaring at a 7 percent monthly pace on top of an already “high” level, English said. Dairy products make up almost a quarter of the nation’s exports and Auckland-based Fonterra Cooperative Group Ltd. is the world’s largest exporter of the goods. English also cited crude oil costs approaching $100 a barrel.
Commenting on wool, English signaled he wouldn’t oppose higher prices. Asked about an effort by farmers to organize a cartel, English welcomed the initiative while adding that the government won’t directly help it.
“In a number of our main export sectors -- being dairy, meat and wool -- there are tense but constructive discussions going on about how to commit capital in the right way to take advantage of the positive opportunities,” said English, who took office in November 2008. “It’s great that they are working on that stuff. We encourage it, but we’re not going to direct them.”
To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
