Rates rises wrong as economy stalls: NZIER

Reserve Bank governor Alan Bollard should stop raising interest rates, says an NZIER economist. Photo / Mark Mitchell

The Reserve Bank should stop raising interest rates, amid worrying evidence that the economy recovery is stalling, says New Zealand Institute of Economic Research Quarterly Survey of Business Opinion chief economist Shamubeel Eaqub.

His comments come with this morning's release of NZIER's June quarter Quarterly Survey of Business Opinion, showing a drop in optimism and actual activity experienced across the economy, and a fall in seasonally adjusted business confidence from 36 per cent to 28 per cent between the March and June quarters.

"It's not quite double-dip recession, more a stumbling recovery," said Eaqub, but the very weak growth evident in the QSBO showed a far weaker economy than would normally be expected a year into the recovery.

"Of concern is a renewed weakness in manufacturing, construction, and investment intentions.

"Small firms, which tend to lead the economic cycle, experienced deteriorating conditions in the June 2010 quarter. The outlook is still fragile."

The economy had "yet again" failed to deliver on expectations of a stronger recovery, with some weakening of export activity underpinning ongoing weakness in the domestic economy, where retailers' previously strong expectations were now falling and becoming more realistic, said Eaqub.

"The household sector is far more cautious than at any stage that we've seen in the last decade or so."

ASB bank economist Christina Leung said businesses "now appear less confident in expanding their operations with both investment in Q2, and hiring intentions remaining flat."

Leung said that despite the slightly softer activity outlook, inflation pressures still clearly existed.

"This is reflected in the surge in firms' pricing intentions and cost expectations. Part of this surge is likely to reflect greater awareness of the higher headline inflation over the coming year as a result of the raft of Government charges."

She said today's QSBO result suggested businesses were "slightly less confident of a recovery in demand, and this is contributing to some hesitance to put in place expansion plans."

"Nonetheless, the current level of firms' own assessment of trading conditions suggests economic growth over 2010 will still be reasonably healthy."

A "continued persistence in pricing intentions" should be of concern to the Reserve Bank.

"With the recovery remaining on track and inflation pressure still in place in the NZ economy, we expect the Reserve Bank will continue to steadily remove monetary policy stimulus over the coming year," said Leung.

Shamubeel Eaqub at NZIER was almost alone among economists urging the Reserve Bank not to raise the Official Cash Rate last month, and the latest QSBO bore out his caution, he said.

"The domestic economy is very weak, the international situation remains particularly volatile. The Reserve Bank should have waited and the numbers we are seeing show that., It's a mistake to be raising interest rates when the economy is not growing."

Inflationary pressures, as measured by the QSBO, remained subdued, and sucgh pressure as there is may reflect the combined effect of emissions trading scheme, ACC and GST increases.

- WITH NZ HERALD