By Brian Fallow
WELLINGTON - As inflationary pressures quietly mount, the Reserve Bank will start raising interest rates in November, about general election time, predicts Deutsche Bank chief economist Ulf Schoefisch.
Longer-term rates have risen significantly over the past three months as world bond markets anticipated the tightening move delivered by the United States Federal Reserve late last month.
That has already seen the fixed mortgage rates on offer rise.
But short-term rates, crucial for floating rate mortgages, remain anchored by the Reserve Bank's official cash rate, set at 4.5 per cent in March.
The June quarter inflation figures due out today are expected to be benign, but the Reserve Bank sets policy on the basis of where it thinks inflation will be in the year after next if trends persist.
Mr Schoefisch believed the outlook would appear significantly more inflationary when the bank prepared its November monetary policy statement and the governor, Dr Don Brash, would raise interest rates half a percentage point.
Overall, Deutsche Bank saw a risk that inflation would be 1 to 1.2 per cent higher in the medium term than the Reserve Bank projected in May.
The bank could probably tolerate about 0.3 per cent of that, but that would still leave about 0.8 per cent to be offset by tighter monetary conditions.
That would require the monetary conditions index to be about 400 points higher in a year's time than it is now, said Mr Schoefisch.
He expected three-quarters of that tightening to occur through a higher exchange rate as higher commodity prices and a recovering world economy push the currency up.
But that would still leave the Reserve Bank having to raise interest rates by 1 per cent over the next 12 months.
Mr Schoefisch said the world environment was more inflationary, there was more pressure on unit labour costs and less slack in the economy than the Reserve Bank anticipated in its May forecasts.
Those forecasts assumed a fairly pessimistic outlook for growth among New Zealand's trading partners - 1.9 per cent this year and 2.5 per cent next year.
But consensus forecasts for world growth are being revised up steadily and Mr Schoefisch expected them to reach 2.8 per cent for 1999 and 3 per cent for 2000.
Stronger world growth increases risk of imported inflation. Prices for New Zealand imports, apart from oil, climbed 3 per cent in the March quarter, well above Reserve Bank expectations, and since then oil prices, too, have risen sharply.
The fast turnaround in the labour market suggested less downward pressure on wages than the bank expected, Mr Schoefisch said. The unemployment rate dropped to 7.2 per cent in March, where the bank had expected 7.8 per cent.
He also regarded as over-optimistic the bank's belief that productivity growth (minus 0.2 per cent over the past year) would rebound to 2 per cent and stay there.
Interest rates tipped to rise at election time
AdvertisementAdvertise with NZME.