Brian Fallow: Brace yourself for an interest rate rise

Reserve Bank Governor Alan Bollard File photo

Brace yourselves for interest rates to rise half a percentage point. Beyond that it depends on the dollar.

That was the essential message from Reserve Bank governor Alan Bollard this morning.

It was, as ever, conditional: "Provided current global risk recede and the economy continues to recover."

If those conditions are met he sees little need for the insurance cut to the official cash rate last March after the Christchurch earthquake, 50 basis points to 2.5 per cent, to remain in place "much longer".

But given the fiscal farce being played out in Washington it is not a small "if".

Bollard acknowledged the positive surprise in the growth data since the bank last reviewed rates in June but in the next breath acknowledged the fragility in global financial markets, rattled by uncertainty around the US Government's debt ceiling.

It poses a risk to New Zealand's trading partners and to the strong export prices which have helped get our recovery back on track.

And it has also driven the kiwi dollar to "very high" levels which act as a drag on the economy.

"If this persists it is likely to reduce the need for further OCR increases in the short term," he said.

Bollard is running the risk that his comments will push the dollar higher still.

Alternatively the markets may read it as no more that a statement of the obvious.

Not only the sentiment surveys, including yesterday's very upbeat National Bank Business Outlook, but the hard data on growth and inflation indicate the wider economy shrugged off the February earthquake.

But even after he reverses the subsequent rate cut, either all at once in September or in two stages, it will still leave the OCR at a very supportive 3 per cent.

Beyond that, as so often in a small open economy, we are hostage to events elsewhere.

An export-led recovery requires the global economy to co-operate. Right now, that cannot be taken for granted.