3 Dec 2014

OCR cut calls likely to fall on deaf ears

6:53 am on 3 December 2014

Businesses and unions are demanding an interest rate cut when the Reserve Bank next reviews the cost of borrowing.

Reserve Bank building in Wellington.

Economists say the Reserve Bank is unlikely to cut interest rates this month. Photo: PHOTO NZ

Chief executive of the Northern Employers and Manufacturers Association, Kim Campbell, said lower oil prices and the risk of deflation had changed the rules of the game for business.

Mr Campbell said still-weak demand and near-zero interest rates in many economies meant New Zealand firms were at a disadvantage against their foreign rivals.

"For anyone in the productive sector, these interest rates are an issue," he said.

The official cash rate stands at 3.5 percent, and Mr Campbell said it needed to come down.

"At a time when we need to be competitive in business, a 25 basis point cut is absolutely justified," he said.

And unions echo that sentiment.

Economist at the Council of Trade Unions, Bill Rosenberg, said inflation is low and relatively high interest rates were propping up the dollar.

Dr Rosenberg said that was costing people their jobs.

"We've seen that in cartons (Orora Cartons) and paper bags (Wellpack), and Heinz Watties closing down some of its lines in the Hawke's Bay. Superyachts are complaining about the high dollar," he said.

Their calls are likely to fall on deaf ears.

While low inflation has surprised the Reserve Bank, it has signalled that historically low interest rates remain stimulatory.

Chief economist at Deutsche Bank, Darren Gibbs, could not see any case for rate cuts at the moment.

While growth has peaked, Mr Gibbs expected New Zealand's economy to have plenty of momentum in the coming year.

"Unemployment continues to fall, wage growth continues to accelerate, and of course there are still risks around the housing market, particularly if migrant inflows remain at the heady levels we've seen in recent months," he said.

Auckland's housing market is picking up steam again after the election, driven by higher ratings values and falling fixed mortgage rates.

A director with mortgage broker, Loan Market, Bruce Patten, said lower interest rates would add further pep.

"The more rates come down, the more activity there'll be," he said.

Mr Patten is picking interest rates will remain on hold.

Most economists agree.

The Reserve Bank will review the official cash rate on Thursday next week for the last time this year, and no change is expected.

Indeed, analysts are picking the official cash rate will stay at 3.5 percent until the middle of next year at the earliest.

And while a rate cut cannot be ruled out, especially if there is a marked slowdown in global growth, economists expect the next move will be up, rather than down.

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