RPT-UPDATE 2-New Zealand c.bank holds fire, signals imminent rate rise

Wed Jan 29, 2014 11:54pm EST

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* RBNZ holds rates at 2.5 pct, signals March rate rise

* C.bank poised to lead developed countries in rate rise cycle

* Reuters poll: All 15 respondents see March tightening

By Naomi Tajitsu

WELLINGTON, Jan 30 (Reuters) - New Zealand's central bank on Thursday gave its clearest indication yet that it will raise interest rates in March, a sign of confidence that the economy will continue its strong recovery despite renewed turmoil gripping emerging markets.

The Reserve Bank of New Zealand, which has repeatedly said that rate rises were on the way in 2014, held its official cash rate at a record low 2.5 percent, the level it has been at for nearly three years.

But central bank chief Graeme Wheeler said that monetary tightening was coming "soon" to quell rising price pressures triggered by a buoyant economy, likely putting New Zealand on track to become the first developed country to raise interest rates in the current cycle.

"While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years," Wheeler said in a statement accompanying the on-hold decision which was correctly picked by a majority of economists.

"In this environment, there is a need to return interest rates to more normal levels. The Bank expects to start this adjustment soon."

Most economists anticipate the New Zealand tightening cycle will begin in March, after a string of strong data showed the $170 billion economy is growing faster than the RBNZ's forecast, while inflation was approaching its 2 percent target.

The markets, which had priced in a near 50 percent chance of a rate rise this week, sold off the New Zealand dollar almost a full U.S. cent to a low of $0.8175.

Interest rate futures <0#NBB:> rose as much as 9 points, while government bonds also rallied, pulling back from losses seen in past sessions when debt prices fell on speculation of an early rate rise.

New Zealand's intentions for raising rates contrast with central banks in Turkey, India and South Africa, which have raised rates this week to stem a precipitous slide in their currencies.

"If they raised rates today, they may have gotten tied up with emerging central banks which have been raising rates to shore up their currencies," said Annette Beacher, head of Asia Pacific Research at TD Securities in Singapore.

"But the RBNZ is looking to raise rates for completely different reasons ... by holding rates, they've managed to distance themselves from what's going on in emerging economies."

NZ ECONOMY ABOVE EMERGING TURMOIL

Economists noted the RBNZ sharpened the tone of its brief statement to all but suggest the rate-hike cycle will start in a few weeks time.

"The RBNZ have given a clear hint that it's all but certain that it's going to raise rates in March," ASB Bank chief economist Nick Tuffley said.

A pioneer of inflation targetting, the RBNZ is aiming to stem price risks as growth speeds up on the back of earthquake rebuilding projects in the Canterbury region, housing construction in Auckland, and high global commodity prices.

The RBNZ said it expected annual growth in 2014 to continue around the 3.5 percent seen in the year to September, making it one of the strongest growing developed economies.

A Reuters poll taken after the decision showed all 15 economists see a rate rise in March.

That would place the RBNZ well ahead of other major central banks in its tightening cycle, given than many others continue to offer monetary stimulus to boost their economies.

The U.S. Federal Reserve, which on Wednesday stuck to its plans to gradually taper its massive bond-buying programme, is some way off from raising interest rates, while the Bank of Japan has another round of quantitative easing. The Reserve Bank of Australia is expected to keep rates low for much of this year.

Wheeler said that uncertainties around the timing and the impact of any withdrawal of monetary stimulus measures by major central banks was having an impact on emerging economies, many of which have seen their currencies plummet in the past week.

In contrast with recent weakness in many emerging currencies, the New Zealand dollar has been supported around historically high levels on rate rise expectations and optimism about the country's economy.

Wheeler said a strong currency was dampening inflation pressures, but added that current levels were unsustainable in the long run. (Additional reporting by Gyles Beckford; Editing by Shri Navaratnam)

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