Traders picking Bollard to bend

Foreign-exchange traders are increasing bets that Reserve Bank Governor Alan Bollard will abandon his pledge to keep interest rates at a record low.

But Bollard said yesterday the markets had difficulty in accepting the fact that interest rates could stay stable and they were frequently wrong.

New Zealand's dollar has appreciated 3.45 per cent this month versus the US dollar on speculation the central bank may raise borrowing costs as soon as March following gains in consumer spending and house prices. The increase in the kiwi is second only to the Zambian Kwacha's 4.27 per cent rally in the currency market, data compiled by Bloomberg show.

The kiwi rose 18 per cent this year even though Bollard said in July that New Zealand's dollar needs to be "persistently" weak to aid growth. The gains aren't over, say strategists at Standard Chartered who correctly called the rally, Barclays Capital, the world's third-biggest currency trader, and Bank of America-Merrill Lynch.

"New Zealand may surprise people as one of the first central banks to tighten," said David Tien, a money manager at Fischer Francis Trees & Watts in New York.

Interest-rate swaps indicate policy makers will raise borrowing costs by 1.18 percentage points within 12 months, an index compiled by Zurich-based Credit Suisse shows. Consumer spending as measured by retail sales rose 0.4 per cent in the three months ended June 30, the first gain in seven quarters, according to Statistics New Zealand. Home prices rose for a third month in July, raising expectations the nation's worst recession in 30 years is over.

The reports came after Bollard said in July that the overnight cash rate will stay at 2.5 per cent or move lower until the latter part of 2010.

Traders say the statements carry little weight after the Reserve Bank cut borrowing costs from a record high of 8.25 per cent in July 2008, four months after Bollard said they would stay unchanged "for quite some time".

"The RBNZ panicked at the beginning of the year when they slashed rates," said Dale Thomas, head of currencies at Insight Investment Management in London. "The circumstances have changed. They are out of the recession. The RBNZ is more likely to surprise the marketplace by putting rates up sooner than later."

Thomas said he expects the kiwi to rise above US70c.

But speaking on National Radio yesterday, Bollard said: "The market's always got its own views, and often it's wrong. We'll come out with our views next week and we'll be, as usual, clear cut about that.

"The financial markets either want things to go down or they want things to go up. They just don't seem to do stability very well."