New Zealand Earthquake

February 22, 2011

On the South Island near the city of Christchurch, a 6.3 earthquake has reportedly caused extensive damage and over 65 deaths.  The region was hit by a 7.0 quake last September 4th that produced an estimated $5 billion of damages to infrastructure, residential and commercial property.  New Zealand economic growth in 2010 was softer than had been anticipated before the first quake.  GDP edged up just 0.1% annualized in 2Q and then slipped 0.2% in the third calendar quarter.  Officials at the Reserve Bank of New Zealand had lifted the Official Cash Rate from 2.5% to 2.75% last June and 3.0% in July, but tightening was put on hold thereafter. 

The authorities have projected a pick-up in growth with support from earthquake repairs but, amid uncertainty caused by the disaster, had elected to defer further interest rate increases until the recovery became “more robust” and core inflation showed “more obvious signs of increasing.”  Officials had also been concerned about the strength of the New Zealand dollar, which has since calmed down.  The so-called kiwi is 4.1% stronger against the greenback than when the first quake hit, but the Australian dollar has risen 9.4% in that span.  Today’s new quake will presumably delay the onset of repairs becoming a source of economic growth in New Zealand. All other things the same, this means that the pause in monetary tightening will be extended longer.  Whereas the kiwi’s initial response to the quake in September had been to rise as traders looked ahead to the repairs, today’s instant reaction by the currency was to fall.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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