Economists bring rate hike forward

Economists have brought forward their expectations for interest rate rises following stronger than expected unemployment figures yesterday.

Wednesday, November 12th 2003, 6:56AM

by Jenny Ruth

Some economists expect the Reserve Bank could start increasing interest rates as early as December following much stronger than expected employment figures, which showed the unemployment rate at a 16 year low at 4.4%.

Previously, most economists hadn’t expected a rate increase until the second half of next year.

They had been expecting the unemployment rate to rise to 4.9% and for employment growth of 0.4%. Instead, jobs growth rose 1.3%.

The jobs numbers, coupled with last week’s moves by both the Reserve Bank of Australia and the Bank of England to raise rates, have resulted in the wholesale interest rate markets already anticipating a December increase in the Reserve Bank’s official cash rate (OCR).

The physical 90-day bank bills were trading at 5.39% yesterday while the December bank bill futures were implying a 5.45% rate by then. The OCR currently stands at 5%.

"Those unemployment figures are very low. They will have surprised the (Reserve) Bank as much as they surprised everybody else," says Craig Ebert, an economist at Bank of New Zealand. Just last week, BNZ changed its view to expecting a rate rise in March next year and for the OCR to reach 5.75% by the middle of the year.

"The risks now are that might come a lot sooner," Ebert says.

Anthony Byett, chief economist at ASB Bank, says the RBA’s move last week shows "quite a significant shift in the risks in the international environment" and the jobs numbers point to a significantly tighter domestic economy that the central bank has forecast.

Moreover, ASB’s own lending figures are showing no signs of slowing. The one ameliorating factor is the continued appreciation in the New Zealand dollar which may stay the Reserve Bank’s hand until January, Byett says.

But when the bank does decide to move, it’s unlikely to stop at a single increase. "They may go 25 points in January and 25 in March – they’re not going to put rates up 25 points and sit back for three months."

Nick Tuffley, economist at Westpac, says the key to when the Reserve Bank moves will be its "pain threshhold. There’s a risk that they actually raise rates next month."

Westpac previously hadn’t been expecting a move until next September. That had been based on a view that inflation wouldn’t prove to be as much of a problem as the Reserve Bank is expecting. "But with (employment) numbers like this, it’s looking increasingly like the Reserve Bank isn’t going to be prepared to wait."

Even the most dovish economists, those at Deutsche Bank, have brought forward their expectations of a rate hike from December next year to seeing a rate hike in the first quarter being "a distinct possibility."

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