7 Aug 2011

Reserve Bank still likely to raise rates - economist

6:12 pm on 7 August 2011

BNZ chief economist Tony Alexander says it's likely the Reserve Bank will increase interest rates in September, despite a downgrade of the United States credit rating on Friday.

Standard & Poor's has lowered America's credit rating for the first time, from AAA to AA+ with a negative outlook.

Mr Alexander says the move is unlikely to have a huge effect on New Zealand.

But he says if the US does go back into recession, commodity prices will drop and world growth will slow.

Mr Alexander suspects the Reserve Bank will still raise the Official Cash Rate, but says now it comes down to whether it will be by quarter or half a percentage point. The OCR is currently 2.5%, which was set on 10 March.

He says traders in New Zealand will not react immediately when the NZX opens on Monday and will be waiting for stockmarkets in Australia and Singapore to open, to see how global markets are responding.

Mr Alexander says he does not think the US credit downgrade will cause a great disturbance in the sharemarket, but there will be some reaction.

He says traders would have anticipated the rating change because Standards & Poor's had said they were looking for $4 trillion of spending cuts and they only amount to about $2.5 trillion.

ASB chief economist Nick Tuffley says the downgrade of the United States credit rating is not likely to send the stock market into a tailspin.

He says while the downgrade could dampen investor sentiment slightly, two other rating agencies, Fitch and Moody's have preserved the United States' AAA credit rating.

Mr Tuffley says the Eurozone debt crisis is a greater threat to global markets than the US downgrade.