Economists predict steady interest rates

By BRIAN FALLOW

Market economists believe, by a two-to-one margin, that the Reserve Bank will leave interest rates unchanged when it delivers its next quarterly verdict on the economy on August 16.

A Dow Jones survey of economists last week found most think that even by this time next year the bank's official cash rate will be only 25 basis points higher than its current 6.5 per cent.

ANZ Bank now expects the cash rate to peak at 6.75 per cent, rather than the 7 per cent it had forecast.

But having reached that peak most likely, it thinks, at the October 4 review, it will stay there until late next year.

ANZ chief economist Bernard Hodgetts said weak confidence combined with higher interest rates, taxes and petrol prices would act as a drag on economic activity.

The June survey of business opinion by the Institute of Economic Research, published last week, showed that weaker confidence was starting to undermine investment and employment intentions, Mr Hodgetts said.

That implied more modest growth for the economy over the rest of the year and less need for monetary curbs.

However, the Reserve Bank would have to balance that against the inflationary dangers from higher oil prices and the continuing weakness of the New Zealand dollar.

June inflation numbers out last week showed little sign of generalised prices increases.

"Weaker trading conditions appear to be limiting the scope for retailers and others to pass these [cost] pressures on to consumers," Mr Hodgetts said.

However, those higher costs would not disappear, and the new industrial relations framework could increase wage pressures.

Export growth would flow through to the domestic sector.

The boost to poorer families from the introduction of income-related state house rents would also stimulate activity, he said.

"But for now we believe the Reserve Bank will undertake just one more 25-point increase in the cash rate in October.

"It is expected to balance off the risks of higher inflation against the possible derailing of the economy if interest rates are raised too aggressively in the current growth environment."

Deutsche Bank senior economist Darren Gibbs expected the Reserve to lift rates 25 basis points next month, but said it was a close call.

The near-term outlook for the economy was weaker than the Reserve had envisaged in its May monetary policy statement, which implied a 25-point rate rise next month, he said.

But the outlook from the end of the year was much brighter, "largely reflecting the sharp fall in the exchange rate to a level 8.8 per cent below the bank's assumed level for the second half of 2000."