New Zealand Leaves Key Rate Unchanged


New Zealand's central bank expects to leave the benchmark interest rate at a record-high 8.25 percent for longer as increasing oil and food prices stoke inflation.

``Inflationary pressures have increased and interest rates are now likely to remain around current levels for longer than previously thought,'' Reserve Bank Governor Alan Bollard said in a statement released in Wellington today after he kept the official cash rate unchanged.

The longest economic expansion in 60 years has created a hiring boom and fanned wage increases, while record prices for dairy products have swelled farmers' incomes, giving Bollard little scope to cut borrowing costs. The central bank will wait until consumer spending and housing demand slow further before contemplating a rate cut, economists said.

``This reinforces the general idea that easing is not imminent and rates could stay on hold for a full year,'' said Robin Clements, chief economist at UBS AG in Christchurch. ``Rates will be staying high for a considerable time, which is good for the currency.''

New Zealand's dollar rose to 76.91 U.S. cents at 10:40 a.m. in Wellington from 76.46 cents immediately before the statement. The benchmark rate is 7.75 percentage points higher than Japan's, making the currency a favorite for the carry trade where investors borrow cheaply in Japan to invest in high-yielding assets elsewhere.

Two-year bond yields rose 10 basis points to 7.53 percent. A basis point is 0.01 percentage points.


Bloomberg
12/5/2007 4:04:02 PM