New Zealand's economy maintained a slow recovery in the third quarter from its longest recession on record, backing market views the central bank will keep interest rates unchanged until the second quarter of 2010. Gross domestic product rose a seasonally adjusted 0.2 percent in the three months to September 30, compared with upwardly revised 0.2 percent growth in the previous three months, which ended five quarters of contraction.
Economists polled by Reuters had forecast a 0.3 percent rise, while the Reserve Bank of New Zealand had predicted a 0.4 percent gain. "The Reserve Bank will see this as confirming its view that it will remain on hold until the middle of next year," said ASB Bank chief economist Nick Tuffley.
The New Zealand dollar fell around a third of a cent to a three-month low around $0.6970/75 before settling back around $0.6990/70. The implied yields on bank bill contracts were a tick lower along the curve, as traders slightly trimmed their rate expectations on the weaker-than-expected data.
The central bank has been at pains to douse expectations of an early start to the tightening cycle as growth and inflation pressures gather pace. In its December 10 monetary statement, the bank signalled tightening may start around mid 2010, while wholesale rates were forecast to rise possibly as soon as April. The central bank slashed its cash rate by 5.75 percentage points between July 2008 and April this year to 2.5 percent and has kept rates there since then.
Markets have priced in around 60 percent chance of a quarter-point rate rise in March, down from a peak of 90 percent on December 15, but have fully priced in a hike in April. A Reuters poll, conducted before the GDP release, showed a majority of 17 economists expect the next move to be a hike in the second quarter of 2010 and a sharp tightening to 4.25 percent by year end.
"We see June 2010 as still the central case for when the tightening cycle starts. There is simply not sufficient data to warrant hiking as early as March," said ANZ-National senior economist Khoon Goh. A Credit Suisse measure shows the market is now pricing in around 203 basis points of tightening for the next 12 months, down from 226 early last week.
The recovery is expected to pick up pace in the fourth quarter, with data already pointing to improved retail sales, house sales and prices, although staying within the Reserve Bank of New Zealand's forecasts. "The economy will have strengthened a bit more in Q4 to 0.6 percent, and maybe something around 1 percent for the beginning of next year," said Deutsche Bank chief economist Darren Gibbs.
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