By Brian Fallow
WELLINGTON - WestpacTrust economists think Reserve Bank Governor Don Brash will raise interest rates on November 17, despite the surprise contraction in June quarter gross domestic product.
But the Bank of New Zealand thinks he will wait until next year.
ANZ Bank rates it 60:40 that he will move in November.
With the experts divided, it may be instructive to recall the reasons Dr Brash advanced in his August monetary policy statement for his warning that a rise in the official cash rate was likely to be needed before the end of the year.
The most important development pointing to earlier and stronger inflationary pressures, he said, was a marked improvement in the outlook for the world economy.
That is still true, only more so. Forecasts for growth in New Zealand's trading partners have continued to be revised upward.
On the supply side of the export picture constraints from two successive droughts are diminishing.
On the other hand, the drop in economic output in the June quarter will mean that the spare capacity in the economy will take longer to disappear.
The difficulty is to know how much weight to put on that consideration. Some of the "missing" growth from the June quarter may end up in adjoining quarters (the March number has already been revised up two-tenths of a per cent).
There will therefore be more than usual interest in such indicators as the Institute of Economic Research's quarterly survey of business opinion (due October 19) and the employment data on November 4 for signs of how fast or slowly the slack in the economy is being taken up.
Other factors Dr Brash cited in August as favouring a November tightening still seem to hold good:
\EE "Monetary conditions remain stimulatory."
A weakening in the dollar means they are even more stimulatory now. The monetary conditions index was around minus 440 yesterday. That is 265 points easier than the average level the Reserve Bank assumed for the second half of 1999, which is the equivalent of interest rates being 2.65 percentage points lower, for a constant exchange rate.
\EE "Measured inflation is likely to increase significantly over the next year."
Petrol and rates increases are expected to push inflation above 2 per cent by early next year - to around 2.5 per cent, WestpacTrust reckons.
This week's National Bank business confidence survey recorded a rise both in inflation expectations and the number of firms expecting to raise their own prices in the next three months.
\EE "Credit continues to expand briskly."
Figures out since August show both total bank lending and mortgage lending were stronger year-on-year in August than they had been in July, though weaker than they had been in June.
\EE "Wages seem to growing well ahead of productivity".
Incomes data out this week showed a 3.5 per cent rise in weekly income for those in paid employment in the year to June, but hours worked increased only 0.8 per cent.
Economists divided on November rates rise
AdvertisementAdvertise with NZME.