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Home / Business / Personal Finance / Interest rates

<i>Between the lines</i> - Brash may pull more tightly on reins

Brian Fallow
By Brian Fallow
Columnist·
30 Jun, 2000 03:24 AM3 mins to read

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By BRIAN FALLOW

No less unwelcome for being expected, yesterday's increase in official interest rates was a reminder that Don Brash is still only midway through an aggressive tightening in monetary policy.

Even the minority among professional Brash-watchers who thought he could have waited until next month - such as WestpacTrust and
National Bank economists - see further rises as justified and expect the official cash rate to lift another percentage point to 7 per cent by this time next year.

Dr Brash was probably right, however, not to be spooked by the recent turmoil on world sharemarkets.

The consensus forecasts that the bank takes as its guide to the outlook for world growth already assumed that the United States economy would slow from robust 4.6 per cent growth this year to 3.1 per cent next year, as higher interest rates bite.

It remains to be seen where the markets will settle and how American consumers will react.

They may now shrug off the markets' gyrations and carry on their merry way, in which case they can expect more of the same kind of medicine Dr Brash dispensed yesterday.

Or they may opt to spend less and save more without much further prodding from the Federal Reserve.

Either way, it is far from obvious at this stage that the assumptions about world growth and inflationary pressures that underpinned the Reserve Bank's March forecasts need to be substantially revised.

Closer to home, and more menacing from the bank's point of view, were the results of the March survey of business opinion by the Institute of Economic Research this week. It showed a further rise in the proportion of firms reporting higher costs and intending to raise their prices.

A net 30 per cent say it is getting harder to find skilled and specialist staff. And the capacity utilisation index, although no higher than three months ago, is back at the levels it was at the peak of the last cycle.

Offsetting that - though clearly not enough in the Reserve Bank's view - are signs that the surge of consumer spending evident in the second half of last year has tapered off, though surveyed consumer confidence remains robust.

One of the key assumptions the bank is making is that households are more sensitive to interest rate rises because they are more indebted and perhaps because last year's happy experience of interest rates at 30-year lows may have lowered perceptions of what constitutes a high interest rate.

Building firms are reporting a sharp slowdown in work, mirroring a drop in dwelling consents, assuaging any lingering concerns that the housing market would pose the sort of problems for monetary policy that it did during the last cycle.

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