UPDATE 3-New Zealand central bank keeps rate steady, kiwi jumps

Published: 10 Jun 2009 21:23:45 PST

* NZ's central bank holds key rate at 2.5 percent

* The first rate pause in almost a year

* RBNZ says further rate cut possible

* RBNZ repeats pledge to keep rates low through 2010

* NZ dollar gains, debt sold after decision (Adds rising yields, comment)

WELLINGTON, June 11 - New Zealand's central bank left its key rate steady at a record low for the first time in nearly a year and pledged to leave it there till 2010 as the economy shows signs of life, prompting markets to price in the risk that the next move in interest rates will be higher.

The Reserve Bank of New Zealand said bright spots were appearing for the economy for the first time in months, but stressed the risks remained to the downside, noting recent strength in the New Zealand dollar <NZD=> could snuff out a fledgling recovery.

RBNZ Governor Alan Bollard said further, small rate cuts were possible, but financial markets saw Thursday's decision to keep rates unchanged as the likely end of an aggressive easing cycle the central bank began last July.

Traders pushed the New Zealand dollar <NZD=> and interest rate swaps sharply higher, betting that the central bank's next move will be to raise rates at some point to stem any inflationary pressures as the economic recovery gathers steam.

"The market is starting to price in increased expectations of rate hike from early next year," said ANZ-National senior markets economist Khoon Goh.

The New Zealand dollar, or kiwi, rallied almost 2 percent to around $0.6363/70, and interest rate swap yields jumped across the curve. The two-year rate <NZDSM3NB2Y=> climbed 27 basis points to 3.83 percent and the five-year swap <NZDSM3NB5Y=> rose 26 bps to 5.30 percent.

The kiwi and swap rates were further boosted by data showing surprising resilience in employment in Australia. [ID:nSYD414724]

The kiwi has risen 27 percent against the U.S. dollar since March as signs of stabilisation in financial markets and hopes for an end to the global downturn prompted investors to move back into riskier, higher yielding assets.

But Bollard but said direct moves to bring it lower would likely have little effect.

"In time, we expect a renewed focus on domestic developments, particularly New Zealand's stretched external position, to put downward pressure on the New Zealand dollar," he said. New Zealand's current account deficit of almost 9 percent of GDP is twice as much as Australia's and more than three times that of Ireland, which nearly had its banking system wrecked by the global financial crisis.

Some analysts had said the need to contain the currency's strength could force the RBNZ to cut rates further.

"The RBNZ has rightly kept the door open, but our view is that, given what we've seen globally and locally, we would be surprised if we required further rate cuts from here," said Goldman Sachs JBWere senior economist Bernard Doyle.

Analysts now expect the RBNZ to keep its key rate at 2.5 percent at the next review on July 30. A Reuters poll after Thursday's decision showed 13 of 15 economists expect no change in the rate at the review, and will remain at the same level at least until the first quarter of 2010. See [ID:nWLF001368]

New Zealand has been in recession since the start of last year, the longest slowdown in more than 30 years, and the RBNZ forecast at least two more quarters of contraction.

"We expect the New Zealand economy to begin growing again toward the end of this year but the recovery is likely to be slow and fragile," Bollard said.

"We therefore consider it appropriate to continue to provide substantial monetary policy stimulus to the economy."

For a related graphic double click; http://graphics.thomsonreuters.com/069/NZ_RTS0609.jpg

SIGNS OF LIFE

The RBNZ said it expected the large amount of interest rate cuts so far to filter through to more borrowers over coming quarters as existing fixed-rate mortgages come up for repricing.

"Although rising longer-term interest rates overseas are placing upward pressure on longer-term lending rates here, there is room for further reductions in shorter-term lending rates," Bollard said.

As widely expected, the central bank reiterated its pledge to keep the official cash rate (OCR) at or below 2.5 percent until at least the latter part of 2010.

Separately, data showed New Zealand's manufacturing and housing sectors were levelling out after sharp declines, echoing trends seen in some other parts of the world which have spurred optimism that the worst of the global downturn may be over.

The RBNZ has chopped its OCR by a massive 575 basis points since July 2008 from a record high 8.25 percent. The current rate compares with official rates of 3.0 percent in Australia, 0.1 percent in Japan, 1.0 percent in the euro zone and 0-0.25 percent in the United States.

LINKS

> Analysts' comment on NZ rate [ID:WEL415290]

> NZ central bank leaves cash rate unchanged [ID:nWEL000925]

> Central bank policy statement [ID:nWEL000926]

> POLL-RBNZ July official cash rate review [ID:nWLF001368]

> NZ house prices flat, sales rise in May [ID:nWEL000927]

> NZ manufacturing falls for 13 month in May [ID:nWEL476744] (Additional reporting by Gyles Beckford and Adrian Bathgate)