By Mantik Kusjanto
WELLINGTON, April 29 (Reuters) - New Zealand's central bank said on Thursday it would start raising rates in coming months as the economy recovers, pushing interest rate swaps higher on prospects of a rate rise at its next meeting in June.
The Reserve Bank of New Zealand left its cash rate at record low 2.5 percent for an eighth consecutive review, as expected, and said it would lift it depeding on the pace of growth. It had previously pledged to hold rates until the middle of the year.
'It's a little more upbeat than in March, when they were planning to hike in June and I think they are (still) more likely to hike in June given the contents of this statement,' said Darren Gibbs, chief economist at Deutsche Bank.
'I think it's pretty black and white, absent a complete meltdown in Europe, what we're seeing domestically and across the global economy is clearly stronger and that's being reflected in the RBNZ's more upbeat view.'
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For a graphic on NZ rates and inflation
http://link.reuters.com/jej89j
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Interest rate swaps initially fell and futures rose but both reversed course as investors firmed bets that a rate rise would come in June.
Overnight indexed swaps (OIS) indicate a 64 percent chance of a 25 basis point rate rise in June, with such a move fully priced for July. Before the RBNZ announcement, the OIS market had factored in a 50 percent chance of a June move.
The New Zealand dollar initially held its ground before edging around a quarter of a cent lower to around $0.7175/80.
A Reuters poll after the decision showed 11 of 14 analysts favour the first rate hike by the end of June, with two expecting a rate rise in July, and one in September.
CAUTION
Unlike neighbouring Australia, where strong growth has had the central bank raising rates since last October, New Zealand's recovery has stuttered lately after a strong pick-up in the second half last year as the economy emerged from 15 months of recession.
'Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued,' RBNZ Governor Alan Bollard said. 'Similarly, business spending is weak and firms continue to reduce debt.'
'We expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.'
Inflation has been relatively benign, the housing market has stalled, employment has remained weak and retail sales have been volatile, but an upbeat business confidence data earlier this week raised expectations the RBNZ may signal a June rate rise.
Two-year swaps, which had risen 15 basis points in the past week, settled three basis points higher on Thursday.
Interest rate futures initially rose up to 5 basis points before settling as much as 7 basis points lower. Interest rate swaps also reversed course to be up to four basis points higher.
'We take the coming months as a toss up between June and July. September is a possibility but that will require a marked deterioration in either global or local activity,' said ANZ-National senior markets economist Khoon Goh.
'The market is pretty much down to watching the data.'
The RBNZ also repeated that a wide gap between its own rate and bank lending rates would make the upcoming tightening cycle less aggressive than previous ones.
'These factors should reduce the extent to which the OCR will need to be increased relative to previous cycles,' Bollard said.
Markets are now betting on 189 basis points of tightening over the next 12 months, up from 184 basis points before the rate call, according to a Credit Suisse indicator.
(Additional reporting by Gyles Beckford, Adrian Bathgate; Editing by Kazunori Takada)
((mantik.kusjanto@thomsonreuters.com; +64 4 471 4232;
Reuters Messaging: mantik.kusjanto.reuters.com@reuters.net Keywords: NEWZEALAND ECONOMY/RATES (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WELLINGTON, April 29 (Reuters) - New Zealand's central bank said on Thursday it would start raising rates in coming months as the economy recovers, pushing interest rate swaps higher on prospects of a rate rise at its next meeting in June.
The Reserve Bank of New Zealand left its cash rate at record low 2.5 percent for an eighth consecutive review, as expected, and said it would lift it depeding on the pace of growth. It had previously pledged to hold rates until the middle of the year.
'It's a little more upbeat than in March, when they were planning to hike in June and I think they are (still) more likely to hike in June given the contents of this statement,' said Darren Gibbs, chief economist at Deutsche Bank.
'I think it's pretty black and white, absent a complete meltdown in Europe, what we're seeing domestically and across the global economy is clearly stronger and that's being reflected in the RBNZ's more upbeat view.'
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic on NZ rates and inflation
http://link.reuters.com/jej89j
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Interest rate swaps initially fell and futures rose but both reversed course as investors firmed bets that a rate rise would come in June.
Overnight indexed swaps (OIS) indicate a 64 percent chance of a 25 basis point rate rise in June, with such a move fully priced for July. Before the RBNZ announcement, the OIS market had factored in a 50 percent chance of a June move.
The New Zealand dollar initially held its ground before edging around a quarter of a cent lower to around $0.7175/80.
A Reuters poll after the decision showed 11 of 14 analysts favour the first rate hike by the end of June, with two expecting a rate rise in July, and one in September.
CAUTION
Unlike neighbouring Australia, where strong growth has had the central bank raising rates since last October, New Zealand's recovery has stuttered lately after a strong pick-up in the second half last year as the economy emerged from 15 months of recession.
'Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued,' RBNZ Governor Alan Bollard said. 'Similarly, business spending is weak and firms continue to reduce debt.'
'We expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.'
Inflation has been relatively benign, the housing market has stalled, employment has remained weak and retail sales have been volatile, but an upbeat business confidence data earlier this week raised expectations the RBNZ may signal a June rate rise.
Two-year swaps, which had risen 15 basis points in the past week, settled three basis points higher on Thursday.
Interest rate futures initially rose up to 5 basis points before settling as much as 7 basis points lower. Interest rate swaps also reversed course to be up to four basis points higher.
'We take the coming months as a toss up between June and July. September is a possibility but that will require a marked deterioration in either global or local activity,' said ANZ-National senior markets economist Khoon Goh.
'The market is pretty much down to watching the data.'
The RBNZ also repeated that a wide gap between its own rate and bank lending rates would make the upcoming tightening cycle less aggressive than previous ones.
'These factors should reduce the extent to which the OCR will need to be increased relative to previous cycles,' Bollard said.
Markets are now betting on 189 basis points of tightening over the next 12 months, up from 184 basis points before the rate call, according to a Credit Suisse indicator.
(Additional reporting by Gyles Beckford, Adrian Bathgate; Editing by Kazunori Takada)
((mantik.kusjanto@thomsonreuters.com; +64 4 471 4232;
Reuters Messaging: mantik.kusjanto.reuters.com@reuters.net Keywords: NEWZEALAND ECONOMY/RATES (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.