KEY POINTS:
News that New Zealand's growth rate remained sturdy over the June quarter has done nothing to alter the view high interest rates will be with us for some time yet, probably well into next year, economists say.
Data released on Friday showed the economy grew by 0.7 per
cent over the June quarter, against expectations of a 0.5 five per cent gain, and making for an annual average growth rate of 2.2 per cent.
Perhaps more significantly, gross domestic product growth for the March quarter was revised up to 1.2 per cent growth from 1.0 per cent, which means GDP was up 3.2 per cent in the quarter compared with a year ago.
Service industries continued to underpin growth, with finance, insurance and business services industries accounting for more than half of the quarter's increase.
Greater volumes of petroleum extraction meant activity in mining also increased strongly in the quarter, and further growth in this industry is expected as the Tui oilfield comes online in the September quarter.
The higher-than-expected GDP data is likely to make the Reserve Bank, which has the official cash rate set at 8.25 per cent to dampen inflation, a little more nervous about its implications for prices.
But economists do not expect to see another rate hike as a consequence.
UBS New Zealand economist Robin Clements says if it had not been for the revision in the March quarter, the 0.7 per cent gain would have been seen as being within the margin of error.
But taken together, the two quarters show the economy is "travelling at a quicker pace than had been recognised".
The central bank, in its last monetary policy statement, emphasised the uncertainties facing world credit markets arising from the high-risk US sub-prime market.
Clements says if those global issues are to disappear, economists will probably discuss the risk of a rate hike.
But among the factors that could work against such a hike is the bounce back in the New Zealand dollar, higher lending rates and the prospect of slower growth over the next year.
ASB Bank chief economist Nick Tuffley says he does not expect the second half of the year to be as robust as the first, but for the Reserve Bank to hold firm.
"Our view is that the Reserve Bank will be on hold for quite some time and unlikely to be cutting rates until close to the end of next year," he says.
For new borrowers, Tuffley says fixed-rate mortgages are still the way to go because they are still substantially lower than floating rates.
"I would still advise people to fix," he says. "If they are pessimistic about the world economy, maybe fix for a year.
"If they think things are going to hold up relatively well then they might want to err on the side of safety by putting a bit more weight on by fixing for two years or 18 months."
Clements says short-term fixed is probably right. "You want to protect yourself from the possibility that rates will go higher, but I would not want to lock in long term because it seems to me that 8.25 per cent is unsustainable," he says.