Economists soften view on rate rise

Auckland's housing prices affect the official cash rate, says an economist. Photo / Dean Purcell

Survey supports third increase, but risks from dollar, housing market and China affect the enthusiasm for it.

There is solid support from the NZ Institute of Economic Research's monetary policy shadow board for another rise in the official cash rate tomorrow, but it is less emphatic than it was six weeks ago.

Before every OCR review, the NZIER asks a panel of nine economists and businesspeople what they think is the appropriate level for the rate.

The results are combined to give a collective view of what the Reserve Bank should do.

This time the average recommended rate indicates 60 per cent backing for a third successive rise in the OCR, to 3.25 per cent.

But compared with the previous review in April, the support for other rates is more skewed to the downside.

"The domestic economy is strengthening and is taking more regions and industries along for the ride," said NZIER economist Kirdan Lees.

"More businesses are investing and hiring additional staff. Inflation pressures are building, but only slowly.

"Right now, interest rates need to move higher. But risks from the flying kiwi [dollar], Auckland's housing market and a slowing Chinese economy mean future rate increases are less assured."

Former Reserve Bank board chairman Arthur Grimes sees raising the rate tomorrow as a 50/50 call.

"Interest rates have to rise over time, but the path need not be smooth - and it may be useful to leave some degree of uncertainty in currency markets as to when rates will rise," he said.

Bank of New Zealand head of research Stephen Toplis said: "The appropriateness, or otherwise, of the cash rate is highly currency dependent. [But] the ongoing strength in domestic demand, the flattening of mortgage curves and the possibility that the housing market could again take off necessitate further aggression for the time being."

Business New Zealand chief executive Phil O'Reilly said the prevailing positive assumptions about the economy took little account of developing risk, including significant falls in commodity prices, an exchange rate still relatively elevated, and high levels of household and agricultural debt.

"This suggests a cautious approach should be taken to interest rate rises," he said.