RBNZ should leave interest rate hikes till September: NZIER

Global economic uncertainty reduces the need for New Zealand interest rates to start rising in June, as is currently anticipated, says the New Zealand Institute of Economic Research.

Tuesday, June 1st 2010, 11:11AM

by BusinessDesk

"The New Zealand economy is recovering. But dangers are clear and present," NZIER principal economist, Shamubeel Eaqub said in the institute's latest Quarterly Predictions. "The current global financial, political and social turmoil are the key risks.

"We believe there is no urgency for the RBNZ to raise interest rates in this environment," Eaqub said. "A gradual hiking programme from September would allow time to gauge the impact of the current risk flare, a preferable option to rushing rate increases that may have to be reversed."

On top of that threat, NZIER believes current official forecasts of economic growth are too optimistic and that the economy is "more fragile than meets the eye."

This is despite strong confidence indicators such as yesterday's National Bank Business Outlook survey for May, which found optimism about economic conditions in coming months consolidating at around net 50% positive.

"The consensus expects economic growth of 2.8% and 3.3% in 2010 and 2011 calendar years. We are less optimistic," Eaqub said. "We expect a more subdued recovery at 2.4% and 1.8%.

"While confidence measures are very optimistic, household spending is still stagnant. The recent economic boost from migration is also fading, as emigration to Australia accelerates."

He said the performance of exports "is only now beginning to stage a broad based recovery - until recently much of the strength was concentrated in dairy and forestry."

A combination of reduced credit growth and government spending over the next year would also slow economic growth, he said. New Zealand would be negatively affected if global growth slows as a result of current European financial tensions, the institute says.

NZIER expects inflation to spike to around 5% in early 2011 due mainly to a rise in GST, introduction of the ETS and increases in ACC levies.

"For many lower income households the tax cuts will be largely spent on living cost increases, which will be compounded by rising mortgage rates," the institute says.

This prediction comes as a new One News Colmar Brunton poll for TVNZ shows only one-third of New Zealanders believe they will be better off from the Budget tax package.

Prime Minister John Key said yesterday he took heart from the fact that a larger number believed the Budget was fair, and predicted that final reactions would not be known until the personal tax cuts had actually occurred in October.

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