By BRIAN FALLOW
Economists are confident that Acting Reserve Bank Governor Rod Carr will raise interest rates a quarter of a percentage point next week - but some are not so sure he should.
The bank will announce the result of its latest rate review next Wednesday.
A Reuters poll of 12 market economists rated the odds of a 25-basis-point increase in the official cash rate (OCR), to 5.75 per cent, at an average 64 per cent, with a 25 per cent probability of no change and an 11 per cent chance of a 50-point increase.
Further increases are expected, pushing the rate to 6.5 per cent by the end of the year.
Gross domestic product figures due on Friday are expected to show the economy started the year with a hiss and a roar. The average forecast is 1.1 per cent growth for the quarter, which would push the annual rate to 3.1 per cent.
Deutsche Bank economist Darren Gibbs said the quarterly forecast was only marginally stronger than the 1 per cent growth the Reserve Bank predicted in its May statement, and would have little impact on its view of the economy's momentum.
Consumer spending is the main propellant, boosted by immigration, good farm incomes, low interest rates and the wealth effect from a buoyant housing market.
"However, we are loath to extrapolate this strength," said Gibbs.
Rising interest rates, the stronger New Zealand dollar, weaker migration flows and substantially weaker commodity prices would gradually rein in spending.
"If the decision were ours to make we would give serious consideration to leaving rates unchanged [next week]," he said.
The dollar was already 6 per cent higher on a trade-weighted basis than the Reserve Bank's projected average for the second half of this year.
Against the Australian dollar - important for the manufacturing sector - it was at 4 1/2-year highs.
"Although the New Zealand dollar is probably still undervalued against the US dollar, we think it is now close to fair value on a trade-weighed basis," Gibbs said.
The negative impact on exporters would swamp any good news in forecasts of growth among New Zealand's trading partners.
And those forecasts were increasingly challenged by evidence that the US recovery was less vigorous than previously expected.
Bancorp Treasury Services also argued that the Reserve should not raise interest rates.
Monetary conditions, especially the exchange rate component, had already tightened further and faster than the bank intended, in part because of its "inept" communication with the markets, it said.
"Telling the world the OCR would peak around 6.5 or 6.75 per cent mid-2003 was unwise. It caused a rally in the currency based on the 'certainty' of central bank backing of the interest rate differential.
"The currency was not bought to access New Zealand's wondrous economy or its fabulous markets. It was simply because the currency bought today could be sold tomorrow at a higher rate."
Bancorp said that having dug this hole, the Reserve Bank should stop digging.
Rate will rise but is it wise?
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