Rising confidence puts pressure on rates

By Phil Boeyen, ShareChat Business News Editor

Thursday 28th February 2002

A sharp improvement in business confidence has increased the likelihood of an interest rate rise in May according to Deutsche Bank.

Details of the latest National Bank business outlook survey were released early Thursday showing that headline business confidence increased over the holiday season with a net 16% of respondents expecting general business conditions to improve over the coming year.

The figure compares to a negative 2% result at the end of December.

National Bank chief economist, John McDermott, says New Zealand businesses have regained their confidence because of stimulatory monetary conditions and a domestic economy running at a fast clip at the end of last year.

Dr McDermott says recent domestic economic developments have turned analysts' attention to the question of when will the Reserve Bank increase interest rates.

"Financial market participants fear an increase as early as May but the Reserve Bank is more like to wait until August before increasing rates, to be sure a durable economic expansion is underway."

Most other survey indicators, including own activity, employment intentions, investment intentions, and profit expectations, all improved on December's results.

Despite the National Bank assessment another commentator, Deutsche Bank, believes the survey results have raised the probability of a 25 point interest rate rise in May.

"The activity outlook series has historically been a good indicator of GDP growth going forward. Its current level suggests that the GDP growth cycle will bottom out at around 2.5% during 2002, significantly above the 1.5% included in the RBNZ's November forecasts," Deutsche Bank says.

"We expect the RBNZ to start its tightening cycle with a 25 bps move in May and return the OCR to 6.0% by early 2003, up from 4.75% currently."

Finance Minister Michael Cullen has welcomed the rebound in business confidence and says it augurs well for growth.

He says the results are not surprising given the stream of positive economic data this year and the strong optimism in the economy shown by recent opinion polls.

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