NBBO survey adds fuel to the rate hike fire

If ever there was a reason why the Reserve Bank should start raising its cash rate sooner rather than later, today's National Bank Business Outlook (NBBO) Survey was it, according to BNZ.

Monday, May 31st 2010, 5:54PM

by Jenha White

Its Economy Watch says the survey implied that: GDP growth will soon be above trend; inflationary expectations are pushing higher; businesses know that rates are headed higher; capacity utilisation is rising; and even the lagging indicators of employment and investment are proving to be robust.

"This being so, we feel more assured in our view that the Reserve Bank is likely to pull the trigger at next week's Monetary Policy Statement."

ANZ Market Focus also believes the Reserve Bank is more likely than not to raise rates next week and while global financial turmoil is a consideration, it has been pleasantly surprised by how muted the impact has been so far, especially in New Zealand. It says global volatility died down considerably late last week.

"Markets are still biased towards a hike and the local economic case for one is very strong.

"We suspect the Bank is more likely to want to get going and pause later if needed, rather than find itself in catch up mode later on."

It says markets are turning to this view and are likely to do so with more vigour if the Bank of Canada raises tomorrow.

"But the way things are unfolding, a lot can change in a week," says ANZ.

Westpac Weekly Commentary agrees saying stronger data and a more confident tone from the Reserve Bank have cleared the path for a series of rate hikes, with June the most likely start date.

ASB Business Weekly says short-term interest rates have edged up over the past week, reflecting the fact that markets are starting to price in a greater chance of an OCR increase in the June 10 meeting.

J P Morgan Weekly Prospects on the other hand, believes the Reserve Bank can afford time on the policy sidelines next month as Sovereign debt concerns are escalating in the Euro area, while some of the domestic data has printed on the downside of expectations.

BNZ Markets Outlook suspects New Zealand will see more subtle shifts in spending behavior over the coming year as the Budget changes dissuade consumption and encourage savings, at least at the margin.

"Of course, to the extent that various tax changes do bring about a behavioural shift in household spending and saving decisions, it will have an impact on the extent that the Reserve Bank needs to raise interest rates."

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