Two more interest rate hikes predicted by September

1.00am

The Reserve Bank will hike interest rates twice more by September to snuff out rising inflation, the New Zealand Institute of Economic Research (NZIER) said today.

Previously, it had forecast just one more rate increase, but in its latest Quarterly Predictions, it says inflation is now forecast to rise to 2.5 per cent by the March 2005 quarter from 1.6 per cent at present.

A sharp fall in the dollar, higher world commodities prices, higher oil prices, manufacturing production at a 30-year high and modest stimulus from the budget spend-up, will all add to inflationary pressure.

"The more inflationary outlook will prompt the Reserve Bank into lifting interest rates over coming months," said senior economist Doug Steel. "We forecast the Official Cash Rate to lift to 6 per cent by the end of September."

The institute forecasts a slightly sharper economic slowdown than Treasury forecast in the budget last week. NZIER sees growth slowing from 3.3 per cent to 2.8 per cent next year, the same as Treasury, but falling to 2.1 per cent in the March 2006 year against Treasury's 2.5 per cent forecast.

However, NZIER's economic forecasts are slightly more optimistic than it made last quarter because of the stronger outlook for world growth and the fall of the New Zealand dollar.

World prices for New Zealand's commodity exports have risen.

"A modest fiscal expansion has also lifted the short-term outlook for growth," said Mr Steel.

An easing in the net inflow of migrants remains a key factor behind the forecast slowdown in economic growth.

"This will reduce residential investment and dampen increases in households' net wealth through slower house price appreciation, resulting in softer growth in household spending."

The impact on growth from higher oil prices is likely to be less than in previous periods of high prices given the drivers of recent increases.

Household spending has been a factor behind a surge in business investment, especially investment in plant, machinery and equipment. NZIER estimates growth in business investment made a greater contribution to real GDP growth than the often cited boom in residential building investment.

Business investment is seen plateauing, rather than falling, while housing spending and residential investment will lessen the need for business investment.

NZIER is forecasting a strong improvement in export growth in the March 2005 year and further strengthening the following year. World economic growth, a weaker kiwi dollar and strong commodity prices will underpin exports.

- NZPA