Interest rates to 'stay high' after tax cuts

National's tax cut plans will keep interest rates high for longer and prevent them from falling as much as they otherwise would, Council of Trade Unions economist Peter Conway says.

In an open letter to National finance spokesman John Key, Conway argues that if a sum of equivalent value - to the $2.2 billion in tax cuts National is promising from April 1 next year - was being considered as a wage increase for the CTU's 300,000 union members, it would be viewed as an inflation risk.

"There would be an increase in demand if 300,000 workers all got a $170 pay increase in the same week. They could afford to pay higher prices for goods and services as this higher level of demand would allow retailers to charge higher prices, which would add to inflation."

Conway acknowledges that economists are forecasting slower growth next year and that the effect of higher oil prices could slow growth further.

This could lead the Reserve Bank to cut interest rates later next year and by less than it otherwise might, he said.

But even half a percentage point difference in interest on a $200,000 mortgage represented $15 a week.

The May Budget forecast a net stimulus from the Government's tax and spending plans averaging a little over 1 per cent over the next three years. National's tax cuts would boost that to about half as much again.

But in a context where growth by April 1 next year is expected to have been below average for nearly two years and where money is being drained by high petrol prices, market economists have argued such a fiscal stimulus would be timely.

Deutsche Bank chief economist Ulf Schoefisch said the timing of tax cuts "wouldn't be too bad. It could hit just when the economy really needs it."

But he has also argued that it is likely to mean the Reserve Bank would not need to cut rates as much.

Bank of New Zealand economist Craig Ebert said the fiscal stimulus could cushion the slowdown.

"But you have to be worried about stoking the household sector that is still driving most of the growth and is the main contributor to a huge and expanding current account deficit."

Business Roundtable executive director Roger Kerr said the tax cuts would boost the supply side of the economy over time by improving incentives to work and to invest.