Banks see further interest rate rises

By BRIAN FALLOW

The National Bank has served up fresh meat for the hawks at the Reserve Bank.

As central bank Governor Alan Bollard lifted interest rates from 5.75 to 6 per cent, the National Bank's Business Outlook survey said the economy remained strong and warned about inflation.

Underscoring this, Bank of New Zealand economists say the economy is firing on all cylinders at "just the wrong time for the Reserve Bank".

Making his fourth increase this year, Bollard left no doubt that the bank is still inclined to tighten the inflation-busting screw.

"It appears the current economic strength may be maintained for longer than we anticipated in June, and it could add to price pressures," he said.

"Further tightening of monetary policy looks likely to be necessary."

He said there were signs of a slowing in some domestic sectors. But the export news was positive - rising commodity prices and improving export incomes despite the continued strength and volatility of the dollar.

The results were a buoyant economy, strained capacity and inflation pressures.

The National Bank's July survey supports that view.

A net 13 per cent of respondents expect the general business environment to worsen over the next year, but that is an improvement from 19 per cent in June and 42 per cent in March.

Firms' expectations of their own activity - a more reliable indicator of economic growth - have strengthened, and a net 29 per cent expect better times. This is a level consistent with economic growth of around 3 per cent this year.

"With 2.3 per cent in the bag from the first quarter alone this seems a safe bet," National Bank chief economist John McDermott said.

"Chances are we could record another year of nearly 4 per cent growth."

Expected profits and export sales improved. Investment and hiring intentions are up.

A net 30 per cent of firms expect to raise prices, up slightly on June.

"This is the highest level they have been since February 2001, just after inflation peaked at 4 per cent," McDermott said.

Before the Reserve Bank's hawkish statement the money markets had been pricing in only a 50/50 chance of a further interest rate increase on September 9, when the bank will next review rates.

But BNZ economists said in their note that most were now reckoning on a September move and then probably another increase.

"The economy is now firing on all cylinders at just the wrong time for the Reserve Bank," they said.

The external sector was no longer slowing growth and inflation.

"Soaring commodity prices and a dollar that is no longer in the ascendancy have proven a godsend for the rural sector, which is also benefiting from solid volume growth," the note said.

Economists expect next month's labour market data to provide little comfort to the Reserve Bank's concerns about wage inflation.

Deutsche Bank chief economist Ulf Schoefisch expects only one more 25-point increase this cycle.

That is because he expects the dollar to resume its upward trend as a result of renewed weakness in the United States dollar, and a widening gap between New Zealand and Australian interest rates.

The Reserve Bank of Australia's official cash rate is 5.25 per cent.

Schoefisch said it would be difficult for New Zealand's Reserve Bank to continue tightening unless the Australian bank raised its rates.