It's time to hike Alan

Alan Bollard will next make an announcement on the Official Cash Rate on April 29. Photo / Mark Mitchell

The robust economic growth recorded in the December quarter is another sign to Reserve Bank Governor Alan Bollard that the crisis is over, the economy is recovering and it's time to remove the monetary stimulus of an Official Cash Rate set at a record low 2.5 per cent.

Statistics NZ figures show GDP grew 0.8 per cent in the December quarter from the September quarter, which was more than the Reserve Bank's forecast of 0.6 per cent.

It included a rebound in manufacturing output off a low base, some stocks rebuilding and some extra consumer spending. Business investment has also rebounded somewhat. All of this should suggest to the Reserve Bank that the 'animal spirits' that power an economy are finally showing through in output. They will also start to drive some inflation pressures.

The Reserve Bank highlighted some of those pressures in its last Monetary Policy Statement, which suggested headline Consumer Price Inflation could hit 5 per cent by the end of this year, thanks to increases in ACC levies, Emissions Trading Scheme costs and a possible GST increase.

The underlying pressures are also bubbling higher with the Reserve Bank seeing core consumer price inflation nudging up to peak of 2.8 per cent in late 2011 from 1.5 per cent later this year.

The Reserve Bank has some leeway, but not that much, particularly if the recent jump in the world oil price and weakness in the New Zealand dollar are sustained.

Bollard has consistently said for months that the first hike won't happen until the middle of 2010.

The question now is how soon can he get away with calling it the middle of 2010? The next OCR decision is on April 29, which may be just a little too soon. The next dates are June 10 and July 29.

Those who have moved to floating mortgages should expect to start paying more from June 10 onwards, just as they're preparing to start paying a GST rate of 15 per cent on everything they buy. The shops might be a little slower than many people expect come Christmas time.

This is the inevitable result of de-leveraging after a credit-fuelled consumption boom that lasted through most of the 2000s, or the 'Naughty Noughties' as I like to call them.



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