This country is likely to become the first developed nation to raise interest rates

Yes, it’s New Zealand.

If you’re into sports, you will have recognised the above image of the famous haka, or the warrior dance, performed by New Zealand’s All Blacks rugby team.

In the financial world, also, the country is set for some international attention as it gears up to become the first developed nation to raise interest rates in the current global cycle of rate-cuts among developed nations.

Last week,  New Zealand’s central bank held its benchmark policy rate, the official cash rate, at 2.5%, but indicated that higher rates are likely soon as inflationary pressures build up from the housing/construction sectors.

The last interest rate cut occurred in March 2011, after an earthquake damaged Christchurch, the country’s second-largest city.

“New Zealand’s economic expansion has considerable momentum… GDP grew by 3.5% in the year to September and growth is expected to continue around this rate over the coming year,” the central bank’s governor, Graeme Wheeler, said in a press release.

Prices are also expected to climb.”In this environment, there is a need to return interest rates to more normal levels. The bank expects to start this adjustment soon,” he noted.

In fact, early this year, HSBC tipped New Zealand as the “rock star” economy of 2014, according to a CNBC report. The bank said rising dairy prices, a boom in construction and a surge in housing demand would be the key drivers.


Two other developed nations also seem to be done with easing interest rates.

The first one is is Australia, where the central bank indicated a period of stability and dropped its ‘easing’ monetary stance. Nevertheless, a rate hike is not on the cards yet.

“On present indications the most prudent course is likely to be a period of stability in interest rates,”  Reserve Bank of Australia Governor Glenn Stevens said in a statement.

The main trigger for an interest rate hike could possibly be rising prices and potentially stronger growth in the housing market. However, those challenges are currently counter-balanced by weakening economic growth and stubborn unemployment levels.

Addressing both concerns will be quite the monetary balancing act for governor Stevens. For now, while there might be no further cuts in the policy rate, the monetary policy remains ‘accommodative’.


The second country to be done with lowering interest rates is the UK.

Again, a rate hike isn’t imminent, but it is possible Bank of England Governor Mark Carney will have to start thinking about an interest rate hike later in the year if the economy continues to show improvement.

More insight into the central bank’s views will likely be known on February 6, after the BoE holds its scheduled policy review meeting.

Of special interest will be he fate of the ‘forward guidance’ issued by the central bank last year. As a indication of when it would consider rate hikes in the future, the central bank announced in August that it would maintain interest rates at the currently ultra-low levels of 0.50 % as long as the unemployment rate was above 7%.

In December, the unemployment rate slipped to 7.1%, a whisker away from the ‘threshold’  at which the bank would consider raising interest rates.

Some experts believe that given the improving growth prospects of  the UK, it may well be time to at least start considering a rate rise in the future, as a recent Financial Times commentary notes.

Carney’s comments on both the course of interest rates and the future of forward guidance (if we get them tomorrow) will make for some interesting reading. For now, he has indicated that there will be no hike in the interest rate any time soon.

Meanwhile, the European Central Bank will also hold its policy meeting  on February 6. Speculation is rife about whether the central bank will consider/announce further monetary easing measures, given the growing threat of deflation gripping the eurozone.

[Image Credit]


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s