Brian Fallow

The Economics Editor of the NZ Herald

Shadow board says time is right to lift official cash rate

Graeme Wheeler. Photo / NZ Herald
Graeme Wheeler. Photo / NZ Herald

The NZIER shadow board believes the Reserve Bank should raise the official cash rate when it reviews it tomorrow.

The shadow board is a panel of nine economists and businesspeople the New Zealand Institute of Economic Research asks what level the bank should set its policy interest rate at.

The results are then combined to indicate the preference for various possible levels.

In the latest survey there is 42 per cent support for an increase in the OCR from 2.5 to 2.75 per cent tomorrow and 19 per cent support for an even higher rate.

Support for staying on hold this week has dropped to 39 per cent from 55 per cent when the bank last reviewed the OCR six weeks ago.

NZIER economist Kirdan Lees said waiting until March to lift rates would give governor Graeme Wheeler the chance to use a full suite of communication tools - including a monetary policy statement, press conference and select committee testimony - to tell the public why interest rates need to go up.

"But the economy is building up steam. Business confidence is soaring, consumers are ready to spend and the Canterbury rebuild will pressure inflation higher over 2014 and beyond. Loan-to-value restrictions also need help to slow the pace of house price rises in Auckland," he said.

Most market economists think Wheeler will wait but the shadow board is a survey of what he should do, not expectations of what he will do.

Bank of New Zealand head of research Stephen Toplis said: "There is no reason not to go now except for the fact that the Reserve Bank has said it won't and for consistency reasons can't."

ANZ chief economist Cameron Bagrie has called a rate hike this week while his counterpart at Westpac, Dominick Stephens, said it was probably better to wait until March when there is superior opportunity to communicate the decision.

NZIER principal economist Shamubeel Eaqub favours an immediate rate hike, saying "interest rates need to rise from very accommodative levels to avoid another episode of an overheated economy and overheated house prices".

The academic economists on the shadow board are divided.

Professor Viv Hall of Victoria University, a former member of the Reserve Bank board, favours an on-hold decision this week by a margin of 55 to 45 per cent.

But Professor Prasanna Gai of Auckland University sees rising risks to monetary and financial stability in current rates of capacity utilisation by firms together with a robust housing market and high debt levels.

"A moderate increase in the OCR would seem prudent both to complement [loan-to-value ratio restrictions] and to trim aggregate demand, particularly given the relatively benign international environment."

Among the business representatives on the shadow board, Business New Zealand chief executive Phil O'Reilly, who was all for no change last time, now sees it as a 50/50 call.

Scott Gardiner of MYOB said interest rates should remain the same through the March quarter to ensure businesses see surging confidence translate into results, while Steel & Tube chief executive Dave Taylor also favoured an on-hold decision.

- NZ Herald

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