Does weak data mean the RBNZ should stop raising interest rates?

The recovery in the New Zealand economy is proving to be a very lacklustre affair which is leaving many people scratching their heads wondering if this is as good as it gets, says BNZ economist Tony Alexander.

Friday, July 16th 2010, 4:45PM

In the Weekly Overview he says that firstly, the results of the BNZ monthly confidence survey showed that only a net 2% of respondents feel the economy will get better over the coming year. This was down from the June result of a net 26% positive and well off September's fairly ridiculous level of +56%.

Alexander says importantly when looking through the many comments submitted by respondents there are over-whelmingly negative comments including from two groups who have traditionally said that things are generally not too evil - the legal and accounting professions.

"Our interpretation of the survey results is that businesses across many sectors feel the recovery is not as good as they had been expecting or hoping."

Secondly weakness in the housing market continued in the monthly report from REINZ. Dwelling sales in June were the second lowest in the month since BNZ's records started in 1988.

Thirdly the retail sales numbers for May were released. Core retail spending in seasonally adjusted terms fell 0.2% which was much worse than the expected rise of over 0.5% by forecasters.

The decline followed a fall of 0.1% in April and shows that over the three months to May core retail spending grew at an annualised rate of just 2.3% after falling 6% three months earlier.

"The best one can say we think is that there is no growth in retail spending and this would seem to gel with the fairly negative comments submitted by retailers in the BNZ survey," says Alexander.

"All up the data received continue to show an economy struggling to find its legs this recovery and we put a lot of this down to simple nervousness about what is happening around the world, cost pressures on families, plus maybe - just maybe - a many decades-long overdue change in Kiwi household behaviour away from borrowing to saving."

Does the data this week mean the Reserve Bank should stop raising interest rates?

According to Alexander - No.

"People must remember that they are taking the official cash rate away from a 2.5% level put in place as New Zealand's contribution to a global fight against a Depression scenario which disappeared off the forecast boards last year."

In addition, he says the Reserve Bank has a good opportunity to promote a structural lift in household savings by raising the cost of borrowing before consumers even think about getting more of someone else's money from the bank.

Thirdly, Alexander believes the Reserve Bank is right to have a good look at inflation two years from now when the lack of business capital spending will have produced some potentially severe low productivity levels and therefore extra cost increases.

"And finally there is a need to get interest rates up just in case the world economy does tumble

back down again and it is this factor which strongly occupies the minds of central banks overseas.

"They want to raise their rates to create buffers in case a new bad scenario comes along and they can then cut them again. They know that if such a scenario occurs before they have raised rates then they could end up stuck with as ineffective a monetary policy as Japan has been stuck with for a couple of decades now."

Alexander says if you add to that the inability of governments to use fiscal policy again if the stuff hits the fan and one conclude that in many ways the world economy is now more vulnerable to a shock scenario than was the case two to three years ago.

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