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Record high NZ dollar to keep interest rates down this year: economic institute

06-01-2011 10:31 BJT

WELLINGTON, June 1 (Xinhua) -- The New Zealand dollar, which reached a record 82.62 U.S. cents Tuesday, is helping keep a lid on inflation, the New Zealand Institute of Economic Research (NZIER), an independent economic thinktank, said Wednesday.

While the NZIER expected the NZ dollar to remain high "for some time," the Reserve Bank of New Zealand might have to raise interests rates to 4 percent next year as inflationary pressures build, said NZIER principal economist Shamubeel Eaqub in a statement.

"The economy is in a holding pattern, but the preconditions for a domestic recovery are strengthening. The Canterbury (earthquake) reconstruction will add to activity next year. We expect the economy to recover strongly from just 0.3 percent growth in 2011 to 3.7 percent in 2012," said Eaqub.

"We expect the RBNZ (Reserve Bank of New Zealand) to hold the OCR (official cash rate) unchanged at 2.5 percent through 2011. As the recovery becomes apparent interest rates will have to rise to curb gathering inflationary pressures."

Despite a gradual recovery, medium term inflationary pressures were building, according to the NZIER's Quarterly Predictions report released Wednesday.

"Businesses have been absorbing rising costs in ever thinner margins. Businesses will look to claw back lost margins and raise prices when the economy recovers. This could see inflation accelerate. The Canterbury rebuilding program is likely to generate construction sector inflation, which may spill over to the wider economy," said Eaqub.

While domestic conditions were steadily improving, risks to the global economic outlook had risen.

"Deteriorating sovereign credit issues in Europe, uncertainty around the end of the quantitative easing program in the U.S., and emerging evidence of a slowdown in the Australian housing market are all causes for concern. In emerging markets like China, economic growth is moderating as authorities tighten monetary conditions to curb inflation."

Australia and China are New Zealand's two biggest export markets, accounting for a third, or 15.5 billion NZ dollars (12.73 billion U.S. dollars), of the country's exports in the year to March 31.

"Exports prices and volumes have been very strong over recent years and have provided a much needed offset against a deep domestic recession. A slowdown in global growth would weigh on exports and hinder the broader recovery."

Eaqub said New Zealand's economic recovery would be "gradual but sustainable" as both the government and households reduced their borrowing.

The New Zealand dollar hit its highest value against the U.S. dollar Tuesday since it began to float freely in March 1985, after reports New Zealand assets such as bonds were drawing Chinese interest.

RBNZ governor Alan Bollard will release his review of monetary policy on June 9.

 

Editor:Yang Jie |Source: Xinhua

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