KEY POINTS:
Along with the arrival of summer sunshine, January may bring a lift in the Reserve Bank's official cash rate (OCR).
Deutsche Bank economist Darren Gibbs is predicting the New Zealand Reserve Bank will be raising interest rates by .25 per cent in its OCR announcement on January 25.
Gibbs said the Reserve Bank should also look at a further .25 per cent lift in March to take the OCR to 7.75 per cent.
He said he is concerned about where inflation will be later in the year and that the country needs a better mix of monetary conditions.
"Don't expect to see the currency substantially lower than it is now unless we get control of credit growth," said Gibbs.
Gibbs said people don't see interest rates as being particularly high at the moment.
He said the shape of the interest rate yield curve and the compression of spreads in the retail market have helped blunt the reserve bank's ability to impact the mortgage market.
"If that's the case, the Reserve Bank needs to be more aggressive on its cash rate. I think the more aggressive they are the better it will be in terms of getting the currency down six to 12 months from now," said Gibbs.
"If the market gets the sense that the economy is more subdued, particularly on the housing front, then I think at that point the currency will soften up.
"What we need in this country is a little bit less borrowing and a little bit more saving and a combination of higher interest rates and a lower currency would help achieve that."
Last week the New Zealand Herald revealed results of a report by ACNielsen showing New Zealanders are unlikely to curb spending even if interest rates were lifted.
The survey asked 1000 people in late November what effect a 0.5 per cent hike in the official cash rate would have on their current spending, to which 94 per cent replied little or none.
According to a survey of 13 economists by Bloomberg, three other bank economists agree with Gibbs' prediction the reserve bank will raise the OCR, but First NZ Capital's Jason Wong is among those that don't see an imminent lift in the cash rate.
"It's a close call, but on balance I think they can afford to wait," he said.
Wong said the reserve bank governor Alan Bollard would have lifted the OCR in the final quarter of 2006 if necessary.
"Now we're sitting in January and I don't think there's still enough information out there for him to be convinced he needs to tighten again," said Wong.
"I think he can afford to wait because we're in a period where the CPI is falling away pretty sharply and now oil prices have gone back down again, so it's given him a bit of breathing space."
Central Bank rates worldwide:
Reserve Bank of New Zealand: 7.25 per cent
Bank of Canada: 4.25 per cent
European Central Bank: 3.50 per cent
Bank of Japan: 0.25 per cent
Bank of England: 5.0 per cent
US Federal Reserve: 5.25 per cent
Source: Bloomberg.
- NZ HERALD STAFF
