By Tracy Withers, Eunkyung Seo and Novrida Manurung – Dec 7, 2011

http://www.bloomberg.com/news/2011-12-06/n-z-may-join-asia-holdouts-as-europe-spurs-australia-rate-cut.html

New Zealand may keep interest rates at a record low, joining South Korea and Indonesia in holding borrowing costs this week after a deteriorating global outlook pushed Australia to ease monetary policy for the second month.

Reserve Bank of New Zealand Governor Alan Bollard will leave the official cash rate at 2.5 percent in a 9 a.m. decision in Wellington tomorrow, all 15 economists surveyed by Bloomberg News predict. All 16 economists in a separate survey expect the Bank of Korea to hold its key rate at 3.25 percent at 10 a.m., while 17 of 22 economists say Bank Indonesia’s benchmark will stay at 6 percent.

The three countries have so far weathered Europe’s deepening debt crisis, with earthquake reconstruction in New Zealand, two previous rate cuts in Indonesia and South Korea’s exports supporting the growth outlook. Asian policy makers who have refrained from easing are juggling the need to guard against inflation with increasing pressure to protect expansion.

“Monetary policy is going to differ country by country,” said Sailesh K. Jha, Singapore-based head of Asia markets strategy at Skandinaviska Enskilda Banken AB and a former Asian Development Bank official. “Korea is looking pretty good; they are obviously concerned about growth but they are not at the tipping point in terms of having to cut” while others are worried about the outlook for exports, he said.
Stocks Fall

Asia stocks dropped for the first time in seven days yesterday after Standard & Poor’s put 15 European nations on watch for potential ratings downgrades, with the MSCI Asia Pacific Index falling 1.4 percent. It rose 0.8 percent as of 10:31 a.m. in Singapore today.

Australia’s central bank cut the overnight cash-rate target by a quarter percentage point to 4.25 percent this week, predicting that “the likelihood of a further material slowing in global growth has increased.” Thailand lowered borrowing costs on Nov. 30 while China reduced lenders’ reserve requirements for the first time since 2008.

In contrast, New Zealand may not change rates until March, when four of the 15 economists in the survey expect an increase.

Bollard forecast in September that the economy will grow 3.1 percent in the year through March 2013 and annual inflation will climb to 2.3 percent by late 2013. He is required to keep inflation between 1 percent and 3 percent.
Wheels Still On

“While the wheels may yet fall off they haven’t so far,” said Stephen Toplis, head of research at Bank of New Zealand Ltd. in Wellington. “This is not an environment that argues for any easing in policy.”

Rebuilding of earthquake-devastated Christchurch is due to begin in the second half of 2012. Bollard said in October it would be “inappropriate, all else equal, for monetary policy to be stimulatory during the reconstruction period.”

In South Korea, gross domestic product expanded more than the central bank initially estimated in the third quarter as exports of cars and metal products increased. The economy grew 0.8 percent over the three months through September from the second quarter, compared with an October estimate of 0.7 percent, the Bank of Korea said yesterday.

“Pressures for a cut are mounting,” said Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc. “But for now, the case for a cut is not sufficiently strong given still robust exports, pick-up in U.S. demand, and high inflation.”

Consumer prices in South Korea rose 4.2 percent from a year earlier in November, accelerating to a three-month high and breaching the central bank’s target limit.
Rupiah’s Decline

In Indonesia, a more-than 5 percent drop in the rupiah in the past three months has threatened to revive price pressures even as easing inflation allowed the central bank to cut rates in October and November.

“The cumulative cut of 75 basis points is sufficient insurance for now to protect growth from a global downturn,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said in a Dec. 1 note.

Bank Indonesia will weigh the impact of a further rate cut on capital outflows when it sets borrowing costs this week, Perry Warjiyo, its director of economic research and monetary policy, said Dec. 5.

“If we look at it from the point of view of slowing inflation, of course there’s still room to cut interest rates further,” Warjiyo said. “But the problem is that the decision on interest rates isn’t dependent only on inflation, but also from the point of view of its impact on capital outflows.”

The risk to New Zealand exports, which make up 30 percent of the economy, has prompted investors to reduce bets that Bollard will raise rates, pushing the nation’s currency down more than 6 percent the past three months.

Fisher & Paykel Appliances Holdings Ltd. (FPA), New Zealand’s biggest maker of refrigerators and washers, said in November full-year operating earnings will fall more than previously expected, citing weak demand.

“The weaker global economy and substantial downside risks to the outlook threaten to derail New Zealand’s export-led recovery over 2012,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “There is little urgency for the Reserve Bank to raise the cash rate.”

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