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Expert's Views
NZIER: Pause in OCR till March 2011The Reserve Bank will pause in raising interest rates until March 2011 given near term growth risks and distant inflationary pressures according to the New Zealand Institute of Economic Research (NZIER).Tuesday, August 31st 2010, 1:18PMPrincipal economist Shamubeel Eaqub says interest rates for households and businesses are much higher than the Official Cash Rate (OCR) or wholesale interest rates which is strangling the recovery with little growth in borrowing. "We expect the Reserve Bank to keep the OCR at 3% until March 2011, and then gradually increase to 5.5% by early 2012. Rates may rise earlier in 2011 if the recovery strengthens," Eaqub says. He believes businesses are not yet ready to pay higher wages or invest in new capital and employees, profit margins are skinny and business borrowing continues to contract - indicating that a very low OCR has not yet encouraged investment in the economy. He believes the recovery is slowing which is evident in local and global data, but believes there is sufficient momentum and stimulus in the economy to avoid a repeat recession. "But the economy will be soft in the next six months. Households remain cautious with spending, net migration will slow further and non-residential construction work is now running dry," He says for retailers it will feel like a recession for some time. "Retailers should plan for a disappointing pre-GST hike spend-up and Christmas shopping. Households remain cautious and are making do with less than before the recession." He says a slow recovery in jobs and wages and debt repayment will dampen spending for some time. On top of that impending food price increases and other one-off costs will offset the personal tax cuts for the lower half of income earners. Eaqub also says the non-residential construction sector is at the precipice of a collapse. "Work usually lags consents by a year - a year ago the level of consented floor area fell by a third. This alone may put around 20,000 construction sector jobs at risk.
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Future interest rate hikes softened
The Reserve Bank has kept the OCR at 2.50% as expected, but had lowered its forecast track for the 90 day bill rate by around 60 basis points (0.6%) to a peak of 4.30% by the end of next year. For borrowers that means floating home loans are not forecast to rise as much as previously forecast. In June the expectation was that the rates would rise 2% in the next 12 months: that figure has now been wound back to 1.4%. MORE » |
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