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Source: Reuters

POLL-New Zealand central bank set to keep rates steady

Published: 26 Jul 2009 20:24:05 PST

* What: New Zealand central bank interest rate decision

* When: Thursday, July 30, 9 a.m. (Wednesday, 2100 GMT)

* Analysts, market sees rates on hold at 2.5 percent

WELLINGTON, July 27 - New Zealand's central bank is likely to keep interest rates at record lows this week, with markets focusing on how long rates will stay there as the economy starts to emerge from its worst recession in more than 30 years.

A Reuters poll of 16 analysts found 15 expected the Reserve Bank of New Zealand (RBNZ) to keep its official cash rate at 2.5 percent on July 30, pausing for the second consecutive month, while one forecast a 25 basis points cut. [ID:nWEL466016]

"The RBNZ is becoming more concerned about a return to debt-driven consumption as the economy recovers, which suggests they no longer see further interest rate cuts as appropriate," said Westpac chief economist Brendan O'Donovan.

In the money market, swap rates <NZDOIS> are also signalling no further change in rates, with the first increase seen next year as indicated by one-year swap at 2.69 percent.

Expectations that the central bank will keep rates steady have hardened as more data has pointed to further stabilisation in the recession-hit economy though the strong New Zealand dollar <NZD=> haunts exporters and casts a shadow over the recovery.

An influential survey this month showed business confidence has risen from a 35-year low in the second quarter, while house sales and prices have picked up. Net migration has also risen as fewer New Zealanders leave the country, further underpinning the economy.

STRONG KIWI

But the export sector continues to struggle coping with the strong currency.

Exports account for about a third of the New Zealand economy, with agricultural products, such as dairy and meat, making up about half of the total, leaving a big part of the economy vulnerable to foreign exchange rate movements.

Fonterra Cooperative Group, the world's biggest dairy exporter, has cut its forecast payout to farmers for this season because of the strong currency and weak prices.

"The currency is becoming critically important in the outlook for the New Zealand economy," said Citi economist Josh Williamson the only analyst forecasting a rate cut.

The New Zealand dollar <=NZD> has risen more than 30 percent against the U.S. dollar since early March as appetite for risky investments has improved on hopes of global economic recovery, much to the chagrin of policy makers.

Central bank governor Alan Bollard said this month New Zealand was likely to emerge from recession earlier than others, but needed a weaker currency to drive growth and rebalance the debt-laden economy.

The central bank has pledged to keep its cash rate at or below 2.5 percent until at least the latter part of 2010, and analysts expect this week's statement to reaffirm that pledge.

"We still see the RBNZ retaining a soft easing bias and committing to keep the OCR (official cash rate) at current levels well into 2010," said ANZ-National chief economist Cameron Bagrie.

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