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Home / Business / Economy / Official Cash Rate

Economists: Expect interest rates to stay up for at least a year

Brian Fallow
By Brian Fallow, Brian Fallow and Paula Oliver
Columnist·
26 Jul, 2007 05:00 PM2 mins to read

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KEY POINTS:

Interest rates are likely to remain high for at least another year, economists warned yesterday.

Their message came after Reserve Bank Governor Alan Bollard raised the official cash rate by a quarter of a point but said that was probably going to be enough.

The increase, to 8.25 per cent, was the fourth since March.

"New Zealanders have been showing early signs of moderating their borrowing," Dr Bollard said.

"Provided they keep this up ... we think the four successive OCR increases we have delivered will be sufficient to contain inflation."

That comment was enough to send the dollar down. It fell from US80.35c to as low as US79.53c. It closed at US79.91c.

The governor acknowledged that the high dollar - driven, he said, by US dollar weakness and New Zealanders' heavy demand for borrowing - was hurting exporters.

But high commodity prices, especially for dairy products, were good news for the country.

"Some of the negative commentary circulating about the economy is unwarranted," Dr Bollard said.

A Reuters poll of 15 economic forecasters found only three who believed the official cash rate would be down by the middle of next year.

ANZ National Bank chief economist Cameron Bagrie said that "in the absence of an accident, rates could be here for another two years".

Auckland Chamber of Commerce chief executive Michael Barnett disagreed with the Reserve Bank's assessment of the economy.

"It is not running strong, we are not recording big increases in commodity prices in around 80 per cent of commodity areas and many exporters are not enjoying a strong demand for their products," he said.

"Instead they are a step further to being crippled by the combination of the higher interest rates the bank is encouraging and the strengthening New Zealand dollar."

Finance Minister Michael Cullen replied with a simple "no" when National's deputy leader, Bill English, asked him in Parliament yesterday whether he would invoke section 12 of the Reserve Bank Act.

Over the past week Dr Cullen answered similar questions by refusing to rule out using the clause to change the Reserve Bank's focus to bring down interest rates.

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