BNZ picks March rate hike

The Bank of New Zealand has stuck its neck out and suggested the RBNZ will raise rates early next year.

Monday, November 10th 2003, 7:58AM

by Jenny Ruth

While most economists are expecting the Reserve Bank to sit on its hands until at least June before raising interest rates, Bank of New Zealand has stuck its neck out with a prediction of a rate hike in March.

The forecast comes in the same week the central banks in Australia and England surprised the markets with rate hikes.

In the US, economists are rethinking when they expect the Federal Reserve to start raising rates and most have brought forward the date, although they still think it won’t happen before the middle of next year.

BNZ economists note that the wholesale interest rate markets put the next rate hike even sooner, in January, although most of its competitors are picking June or later.

"All of the views expressed by the various punters have their merits and all are defensible under certain scenarios," it says.

But it believes the RBNZ is worried that annual inflation will break through the top of its zero to 3% target. Its last forecasts published in September showed inflation peaking at 2.8% early in 2005 and staying there.

Since then, "the bank appears to have, if anything, become more concerned about this prospect rather than less. This is because the majority of economic indicators … indicate activity is surprising on the topside of the bank’s printed forecasts."

In particular, BNZ notes how tight the labour market is with unemployment at 4.7% and business surveys suggesting both skilled and unskilled labour is very difficult to find.

As well, the global economy looks as if it will pick up faster than the central bank was expecting. And the housing market is running hot with annual house price inflation running at 16.2%.

BNZ, along with most other forecasters, think inflation will turn out to be lower than the central bank expects. "But it doesn’t matter what we think. If the bank is nervous, and it is telling us so, then it will act on its own assumptions."

The good news is that BNZ doesn’t think the Official Cash Rate will rise much higher than 5.75%.

« FGNZ leaves Mortgage Alliance

Economists bring rate hike forward »

Special Offers