Uncertain interest-rate outlook

In the Dec. 15 edition of Global Economy This Week, analysts at Credit Suisse wrote “a rate hike in early 2007 is heavily data dependent. We think at this stage the decision is too close to call and we have assigned a 50-percent probability to a rate hike in either January or March 2007.”

Some analysts, however, say steady policy is likely early in the year, with potential for a rate cut by mid-2007 if inflation data improves. The RBNZ targets inflation to average 1-3 percent.

“The 3.5 percent reading in the third quarter 2005 is not ideal, but a good portion is driven by now-fading oil prices,” says Sean Callow, senior currency strategist at Westpac Institutional Bank. “We look for 2.7 percent by the end of 2006 and 2.2 percent in 2007.”

“The economy is running close to full capacity and the high New Zealand dollar is hurting exports, so rapid growth seems unlikely,” Callow adds.

Westpac predicts 2006 GDP to be at 1.8 percent, with a retreat to 1.4 percent in 2007. Moody’s Economy.com expects growth at 2.0 percent in 2006 vs. 2.4 percent in 2007.

“Consumers continue to be the mainstay of the kiwi economy,” says Glenn Levine, economist at Moody’s Economy.com. “The big question mark in 2007 is whether businesses will start spending again after putting up the shutters in 2006. The stronger currency is also a worry and has begun to crimp export growth through the second half of 2006.”