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Business confidence rises on back of lower New Zealand interest rates

Xinhua, July 5, 2016 Adjust font size:

Falling interest rates appear to be helping to drive growing confidence among New Zealand businesses.

A survey from the independent New Zealand Institute of Economic Research (NZIER) on Tuesday showed business confidence was up in the quarter to the end of June.

Demand held up over the quarter, against expectations earlier in the year year of a softening in demand, according to the NZIER Quarterly Survey of Business Opinion.

A net 22 percent of businesses saw increased demand over the past quarter, with a net 19 percent expecting an improvement over the next quarter.

The improvement in sentiment was widespread across the sectors and regions, but confidence diverged between the urban and rural regions, reflecting the differing fortunes of the tourism and dairy industries, said an NZIER statement.

The building sector is a standout, as a solid pipeline of residential, commercial and government work underpinned a further lift in confidence in the sector, but building firms report shortage of skilled staff at its most acute since 2003.

Moderating cost pressures and improved pricing power have seen an improvement in profitability amongst businesses.

The NZIER expected annual inflation to lift gradually over the coming years, but the subdued inflation outlook indicated further scope for the Reserve Bank of New Zealand to cut the official cash rate (OCR), which currently stands at 2.25 percent.

"The heightened uncertainty from Britain's recent decision to leave the European Union (which occurred after our survey closed) suggests a greater risk the Reserve Bank will choose to cut the OCR in August in a bid to buffer the New Zealand economy against any downside risks," said the statement.

The Reserve Bank of New Zealand (RBNZ) has a target range for inflation of 1 percent to 3 percent, but the consumer price index in the March quarter was tracking at 0.2 percent.

An economic note from the ASB Bank Tuesday said the tightening of the labor market indicated in the NZIER survey pointed to an increase in non-tradable inflation pressures over the coming year.

However, the ASB continued to expect the RBNZ to cut the OCR to 2 percent, largely due to the resilient strength in the New Zealand dollar.

"While we also continue to expect a cut to 1.75 percent later this year, there is a high threshold for the RBNZ to cut below 2 percent and if business confidence remains upbeat over the rest of the year, this will reduce the odds of a cut below 2 percent," said the note. Endit