Brian Fallow : Bollard gives clear signal of 2011 rates move

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

Reserve Bank governor Alan Bollard has given a pretty clear signal that he expects to start raising interest rates before the year is out, with 2 per centage points in all by the end of next year.

The good news is that this reflects the bank's confidence in a strong near-term pick up in growth.

It forecasts the economy to expand 4.4 per cent in the year to March 2012.

The bad news is that most of us will hardly be feeling any of that warmth by the time rates start to rise.

With half of all mortgage borrowers now on floating rates and increasingly short terms for the fixed-rate loans, the effect of the OCR increase to come will be felt swiftly.

Real per capita GDP remains stuck at recessionary lows and at the same level it was back in 2004.

The bank's forecasts have private consumption growing very slowly over the next three years, less than 1 per cent a year when adjusted for population growth.

The pick-up in demand for labour as the economy strengthens is expected to be through hours worked in the first instance, before hiring resumes in earnest.

While incomes are expected to rise - even in real terms, once another couple of quarters of inflation at or near 5 per cent are out of the way -- a key judgement the bank is making is that people will continue to pay down debt, and to save more and spend less of their incomes.

House prices, which it believes are still overvalued by up to 10 per cent, are expected to increase only modestly.

All in all little to prompt a Hallelujah Chorus from households, or businesses chasing the consumer's discretionary dollar.

The boost to GDP comes in the near term from the best terms of trade in 37 years, reinforced from next year on by the rebuilding of Christchurch.

While a lot of the boost from high export prices has been applied to reducing farm debt -- which had nearly quadrupled in the between 2000 and 2010 -- the bank expects the high terms of trade to increasingly be spent and flow through to the wider economy.

But it acknowledegs "considerable uncertainty" still surrounds the extent to which the February earthquake has disruputed activity, both in the city and nationally.