Markets brace for interest rate hikes as Brash review expected

By Rob Hosking

Friday 12th May 2000

Interest rates look set for another rise, with most bank economists picking a 0.5% rise in the official cash rate next week.

The Reserve Bank issues its quarterly Monetary Policy Statement on Wednesday and has already signalled a series of interest-rate rises over this year.

While there are signs of a slowing in economic activity, with retail sales and construction sectors down, the most common view from the banks is that Reserve Bank governor Don Brash will go ahead with a projected lifting of the rate to 6.5%.

Capacity constraints in the economy, particularly tightness in the product and labour markets, plus indications of pricing intentions, suggested inflationary pressures are still strong, Deutsche Bank economists said this week. The apparently weaker employment figures in the household labour force survey released last week were stronger than they first appeared, the ANZ pointed out this week.

While the headline unemployment figure was higher than most were picking, the drop was in part-time employment. Fulltime jobs actually increased for the fifth quarter in a row and 3.3% over the past 12 months.

The Reserve Bank's survey is likely to project inflation rising above 2% early next year, the bank believes.

Of increasing significance is the New Zealand dollar, which remains considerably lower than was expected at the start of the year, and appears likely to remain below 50USc for some time. Higher than expected import price rises are already the main inflationary flow-on from this. And although the National Bank business confidence survey showed a dramatic decline in overall mood, businesses surveyed remained upbeat about their own businesses.

The latest interest rate rise comes just as the government launches its review of how the central bank conducts monetary policy. In a carefully worded terms of reference aimed at not spooking the international markets, the review is strictly confined to how the Reserve Bank meets its overall goal of price stability.

While Finance Minister Michael Cullen emphasised the review would focus on ways of improving the operation of the policy, rather than looking to lay the blame for past errors, he also signalled one of the issues to be covered would be the link between monetary and fiscal policy.

That is likely to give the government ammunition to attack its predecessor, as the 1996 tax cuts, which came at a time the Reserve Bank was attempting to tighten an economy unbalanced by a housing boom in Auckland, made control of inflation doubly difficult.

That issue also has salience for the central bank as it sets its monetary policy over the next few months. Dr Cullen's first Budget, due in about four weeks, is set to include extra spending on social services. If the Labour-led regime's fiscal policy becomes too expansionist, Dr Brash will have to put the squeeze on.

Comments from our readers

No comments yet