By Brian Fallow
WELLINGTON - The Governor of the Reserve Bank, Don Brash, opted to err on the side of caution in foreshadowing a rise in official interest rates before the end of the year.
That would be as much as a year earlier than the bank had flagged in its last monetary policy statement in May.
It reflects a much stronger outlook for the world economy, and by extension New Zealand exporters, combined with the bank's belief that there is now much less slack in the economy than it had reckoned on three months ago.
Dr Brash said he had two reasons for flagging the likelihood of a tightening before the end of the year.
One was that it was the bank's honest assessment of what the inflationary situation was likely to require.
The other was uncertainty about the exact timing of the general election relative to the next monetary policy statement on November 17.
The risk was that the bank might find itself tightening shortly after the election, and he did not want anyone to misinterpret the one as the cause of the other.
Analysts regarded the policy as shrewd. If growth proved weaker than the bank expected and the rise in interest rates was deferred until next year, few people were likely to complain. If rates were raised around election time, any risk the move could be seen as political was minimised by posting a clear warning now.
A tightening on November 17 (or even September 29), would be earlier than most economists had forecast but would come as less of a surprise to the money markets, which had priced in a more aggressive tightening track with the official cash rate rising 1.25 percentage points by the middle of next year.
The bank regards the slowdown in gross domestic product growth in the June quarter - to about 0.5 per cent, it believes - as temporary. It expects growth to recover to 1 per cent for both the September and December quarters.
The ANZ Bank chief economist, Bernard Hodgetts, said that seemed optimistic.
The Reserve Bank is forecasting a strong pick-up in exports, including tourism, with better growth in each of the next three years than has been achieved in any of the past four.
That is on the back of substantial and continuing upward revisions in forecasts of growth in New Zealand's trading partners.
Another major change to the bank's outlook since March is a surge in investment in housing.
But it does not expect house price inflation, now trending around 6 per cent a year, to accelerate much, given continuing net emigration and the relatively steady pace of economic growth.
Dr Brash is relying on lowered inflationary expectations and a more competitive business environment to prevent recent rises in petrol and electricity prices, local body rates and motor vehicle registration fees from feeding through into generalised inflationary pressure.
Those increases will raise inflation just above 2 per cent in the first half of next year, the bank projects, but it will then quickly subside back towards the middle of the 0 to 3 per cent target range.
Brash steers a cautious route
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