By Candice Zachariahs Dec. 9 (Bloomberg) -- Banks boosted estimates for the New Zealand dollar for the first time in almost a month, gauging the nation’s improving economy will force the central bank to raise interest rates from a record low as soon as March. The so-called kiwi will likely appreciate 6 percent to 75 U.S. cents by the end of the first quarter, according the median estimate of 32 strategists surveyed by Bloomberg. The forecast had been for 74 cents since Nov. 11 until Commerzbank AG and Scotia Capital turned more bullish this month. New Zealand’s central bank meets tomorrow as Governor Alan Bollard’s pledge six weeks ago to leave rates alone “until the second half of 2010” is being tested after commodities and house prices rose. “That’s not a particularly credible threat given the turn higher in house prices, inflation and commodity prices, offsetting to a large degree the negative impact from a higher currency,” said Sue Trinh, a Sydney-based senior currency strategist at RBC Capital Markets, part of Canada’s largest lender. “The RBNZ has a pretty low bar in terms of its expectations for growth and inflation going forward. The risk is for the kiwi to gain on the bank having to acknowledge this.” New Zealand’s dollar rose 0.1 percent to 70.78 U.S. cents as of 2:40 p.m. in Wellington from 71.33 cents in New York yesterday. It traded at NZ$1.2783 against the Australian dollar from NZ$1.2782. Futures show a 56 percent chance of an increase in the benchmark rate by March, while traders are betting Bollard will raise borrowing costs 75 basis points by June, according to Bloomberg calculations using New Zealand interbank bill futures. Sell Aussie Investors may benefit by buying the New Zealand dollar on declines toward 70 cents, Trinh said, with the bank forecasting gains to 80 cents by the middle of 2010. Trinh also recommended selling the Australian dollar against New Zealand’s if it rises toward NZ$1.2850 as Australia’s central bank begins damping expectations for the pace of further interest rate increases. The Aussie reached a six-month high of NZ$1.2842 on Dec. 3. New Zealand’s commodity export prices jumped the most in 23 years last month, led by increases in milk powder, logs, lumber and aluminum, ANZ National Bank Ltd. said Dec. 3. House prices rose for a second month in November, the government said this month. Prices have risen 4.1 percent since falling to a more than two-year low in April 2008. Companies are ramping up inflation expectations, spurring bets that Bollard will take the benchmark rate up by 1.63 percentage points over the next year, according to a Credit Suisse AG index based on swaps trading. A Nov. 24 central bank survey of 81 business managers showed they now expect inflation will average 2.6 percent in two years’ time, rising from 2.3 percent in a previous poll in August. The central bank aims to keep annual inflation between 1 percent and 3 percent. ‘Knee-Jerk Weakness’ Other data has been less optimistic: Statistics New Zealand said Dec. 8 that manufacturing sales volumes fell for the sixth time in seven quarters and construction shrank. Bank of New Zealand Ltd. recommends investors wait till after the Reserve Bank’s Dec. 10 decision to bet on gains in the New Zealand dollar, with Bollard likely to reiterate his pledge to keep rates at 2.5 percent. “The Reserve Bank will be comfortable enough to reiterate the view that the official cash rate will be on hold for some time to come,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “We may well see some knee-jerk weakness on the back of the RBNZ on Thursday and that will be a dip to buy into.” Hampton forecasts the first rate increase will come in June 2010, with the New Zealand dollar peaking at 80 cents. She recommends buying it against the U.S. dollar on declines toward 70.80 cents and selling rallies in the Australian dollar as it approaches NZ$1.2821. ‘Dovish’ Bollard Bollard’s ability to retain a “dovish line” will be helped by tighter fiscal policy, David Forrester, a Singapore- based currency economist with Barclays Capital, wrote in a note to clients Dec. 3. A report for the government by former central bank Governor Don Brash recommended cutting spending to 29 percent of gross domestic product by 2013, from 36 percent, or NZ$65 billion ($46 billion) this year. The company tax rate and the highest income tax rate should both be lowered to 20 percent, the report said. The Treasury is scheduled to release its half-year economic and fiscal update and the government’s 2010 budget policy statement on Dec. 15. “If the government signals that it is going to rein in fiscal spending and bring the budget back into surplus quicker than currently forecast, that could also be a weight on the kiwi,” Forrester said in a telephone interview. “The overall view is that past those two events may be a good time to buy the kiwi. In the meantime there’s a lot of downside.” Barclays forecasts that Bollard will announce the first increase in the official cash rate in March and “the market’s pricing for a 4.5 percent cash rate by year-end will ultimately prove correct,” Forrester wrote. To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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