Bank now expecting rate rises

ANZ National Bank economists expect Reserve Bank Governor Alan Bollard to raise interest rates next month and again possibly in December as well.

This is a change of view for the ANZ National Bank, which previously, like most other market economists, thought the next move in the official cash rate would be down, although not until later next year.

It arises partly from the National Bank's latest monthly survey of business opinion, which records a jump in inflation expectations, to an average 3.13 per cent from 2.96 per cent last month.

The Reserve Bank is sensitive to the rising trend in inflation expectations because it increases the risk that people will respond to higher fuel and other costs by passing them on to their customers or their employers.

That is a recipe for more persistent and widespread inflation of a kind the bank has a statutory obligation to resist.

The risk is increased because after years of strong growth there is little slack in the economy. And after seven interest rate rises since early last year, the cash rate is the highest in the developed world at 6.75 per cent.

Although it is six months since Bollard last raised the cash rate, his statements since then have repeatedly warned that further tightening could not be ruled out.

"We suspect the Reserve Bank's patience has run out," said National Bank chief economist John McDermott.

The Reserve Bank's September monetary policy statement had at least one more rate rise pencilled into its projections.

The money market has tended to discount those warnings - at least until the past fortnight, when the probability of another rate rise by the end of the year, as expressed in market pricing, has increased from 20 to 80 per cent.

"They have left this promise of a further rate hike on the table for six months," McDermott said. "The market now believes it. They either have to follow through or turn around and admit they don't believe their own forecasts."

The Reserve Bank is looking for growth in private consumption to slow to almost nothing over the next few years. But imports of consumer goods last month were up 13 per cent on August last year. Household borrowing is also growing at double-digit rates.

"There's some risk of a further move up in interest rates in December, on the cockroach theory - if you can see one, there's probably another one round the corner. But we are not completely convinced of that."

If the kiwi dollar were to fall sharply, a move in December would become more likely.

"We have pushed out any prospects of an easing to September next year."

The business sentiment survey, conducted before the election, recorded a fall in confidence about the general business situation over the next 12 months. A net 37 per cent of firms expect it to worsen, compared with 32 per cent in August.

Inflationary trends

NZ's biggest bank now thinks the Reserve Bank will have to raise interest rates again.

Consumers are still spending up large, as the trade figures show.

Confidence in low inflation is eroding.