Brash sticks to course with small rate rise

WELLINGTON - The Reserve Bank's increase in the official cash rate yesterday was greeted with disappointment by business leaders, serenity by financial markets and silence by the Government.

As widely expected, Governor Don Brash raised the cash rate 25 basis points to 6 per cent, making a tightening of 1.5 percentage points over the past five months.

The consensus view among market economists is that rates will go 1 per cent higher yet before the year is out. The futures market has 90-day rates at 7 per cent by the end of September.

Dr Brash said: "Recent indications are that growth prospects here and abroad are at least as strong as we expected last month and that the economy's surplus capacity appears to have been more or less exhausted."

Sharemarkets had been "quite volatile," he said, but financial markets appeared to have taken the view that global growth and inflation prospects had not been materially affected and still expected further increases in official interest rates over the next few months.

"Naturally we will continue to monitor these international markets closely."

Bank of New Zealand chief economist Tony Alexander applauded the wait-and-see approach.

"There is no point in being a reef fish like the Acting Prime Minister [Jim Anderton] and on the basis of one day's movement changing your monetary policy. And a removal of stimulatory monetary conditions is necessary. The economy is growing strongly. Capacity, we estimate, is all used up and as a precautionary move one does need to edge rates up."

But the chief executive of the Auckland Chamber of Commerce, Michael Barnett, said forcing up interest rates still further would do nothing for growth and business confidence.

Manufacturers Federation chief executive Simon Carlaw described it as death by 1000 cuts.

"Our analysis has been showing a pretty worrying lack of investment in future capacity," he said.

He attributed manufacturers' caution about investment to concerns both about monetary policy and to policy changes by the Government in such areas as tax, ACC and industrial law.

Acting Finance Minister Trevor Mallard put out a terse statement saying the Government had no comment on the interest rate rise - an unusual move which the Opposition described as muzzling Mr Anderton, a longstanding critic of the conduct of monetary policy.

WestpacTrust economist Nick Tuffley said the Reserve Bank might be prepared to hang back once the cash rate was at 6.5 per cent and evaluate the impact of past tightenings before going further.

"In our view the tightening cycle is far more likely to finish with an official cash rate of 7 per cent or below, than above 7 per cent."

Mr Tuffley noted that the Reserve Bank did not mention the weak currency as a reason for raising rates.

"The export and import-competing sectors don't seem to have been doing brilliantly, judging from the trade position.

"The bank's view seems to be that theoretically the exchange rate should be turning around the net export position quite a bit, but we are not seeing the evidence of it."