25 Jan 2010

Economists predict interest rates will hold at 2.5%

6:01 am on 25 January 2010

Economists expect the Reserve Bank to keep interest rates on hold at 2.5% on Thursday.

The market had pencilled in a rates rise as soon as March, but weaker than expected inflation data out last week prompted many to move it back a month to April.

Goldman Sachs JBWere economist Philip Borkin says the Reserve Bank will now not be in any rush to raise interest rates. The offical Cash Rate was set at 2.5% on 30 April.

He says they now expect a June start to the tightening cycle.

However, there are signs that the economic recovery is gathering momentum.

Retail sales in December were strong, manufacturing activity reached a two-year high, and consumer confidence surged to a three-year high.

Westpac is tipping the economy to grow 3.7% this year, as New Zealand rides on the coat-tails of rapidly recovering emerging economies. Its forecast is the most bullish in the market.

Economist Dominic Stephens says stronger than expected economic data may, however, force the Reserve Bank to raise interest rates sooner than expected.

He says the New Zealand economy usually rebounds pretty rapidly after recession.

Mr Stephens says an average growth rate nine quarters after recession is about 6%, and everything points this time to a normal recovery.