4 Apr 2011

Worries about inflationary pressures

6:06 am on 4 April 2011

Economists will be closely watching to see how much spare room companies have to expand production this week.

The NZ Institute of Economic Research's quarterly survey of business opinion comes out on Tuesday and includes capacity constraints in the economy.

Some analysts are worried that any constraint may fan already heightened inflationary pressures and are urging the Reserve Bank to remain vigilant.

But other economists argue that hasty rises in interest rates could choke off a fragile recovery.

BNZ head of research Stephen Toplis says inflation is lurking everywhere you look.

Food, fuel, insurance, rent and electricity prices are all on the rise.

He says there is a threat that the pressures could be driven by supply constraints.

Mr Toplis says it's unknown whether the demand for new construction that lies ahead will lead to significant price rises.

He says people need to be prepared for the possibility of rising inflation and its consequences.

Rate rise due eventually

ANZ chief economist Cameron Bagrie says the Reserve Bank will need to eventually raise interest rates.

He says the Reserve Bank has an expectation that inflation will be at 2.3% at the end of this year.

Mr Bagrie says the Reserve Bank will need to unwind the policy support it's given the economy, but that decision is not likely to take place until the end of 2011 at the earliest.

But the Council of Trade Unions says it believes any inflation effects as a result of the rebuilding will be localised to Canterbury and the building industry.

CTU economist, Bill Rosenberg, says the danger if the Reserve Bank raises its OCR too quickly is that New Zealand will remain in recessionary conditions for too long which would lead to unemployment rising due to insufficient investment.

He says that could mean the recovery takes longer to occur in the rest of the country.

Mr Rosenberg says it will be a balancing act for the Reserve Bank.

The Official Cash Rate is currently 2.5%. It was lowered from 3% on 10 March after the Christchurch earthquake.