24 Apr 2014

Fears for economy if rates keep rising

9:03 pm on 24 April 2014

Unions and some business groups are warning that economic activity may stall if interest rates keep rising.

The Reserve Bank raised the benchmark interest rate to 3 percent on Thursday - the second increase in six weeks - due to the faster growing economy and said further rises will follow.

Reserve Bank Governor Graeme Wheeler.

Reserve Bank Governor Graeme Wheeler. Photo: RNZ

Reserve Bank Governor Graeme Wheeler said on Thursday the economy had considerable momentum, led by strong growth in the construction sector and high dairy prices. Net immigration continued to rise, boosting housing and consumer demand.

Mr Wheeler said inflationary pressures were increasing and were expected to continue doing so over the next two years.

The central bank upgraded its estimate of GDP growth for the year to March to 3.5 percent. It is seeking to keep inflation near the middle of its 1-3 percent target band, which it said will ensure that economic expansion can be sustained.

"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure," Mr Wheeler's statement said.

However, it added that the bank did not believe the current level of the currency was sustainable.

John Key.

Prime Minister John Key. Photo: RNZ

Prime Minister John Key said interest rates are rising because the economy is doing well. He said the economic expansion is broad-based and interest rates are still historically low. Mr Key said the Government is doing its part to ensure that interest rates don't need to rise any further than they need to.

"The real challenge for the Government is to make sure it supports the process the Reserve Bank is following and we don't add fuel to the fire. That's one of the reasons why in our Budget you'll see that we're quite cautious in our expenditure - there is new expenditure but it's at a level we believe won't put pressure on further rate hikes."

But unions and an Auckland business lobby group argue that rising interest rates will snuff out growth by choking consumer spending and deterring business investment.

Kim Campbell, chief executive of the Employers and Manufacturers Association in Auckland, warned on Thursday that economic activity could come to a grinding halt by the end of this year if interest rates keep going up.

Mr Campbell told Radio New Zealand's Checkpoint programme many people such as homeowners and farmers are heavily indebted, and higher interest rates will affect their spending. He said the real issue - building more affordable houses quickly in earthquake-hit Christchurch and Auckland - is not being treated urgently by the Government or councils.

However, most analysts say these fears are overstated, and New Zealand can cope with what are still historically low interest rates.

The New Zealand dollar rose a third of a cent to US86.25 cents immediately after the announcement and remained at that rate on Thursday evening.

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Photo: RNZ / Diego Opatowski

Mortgage rates set to increase

A major bank has signalled higher home loan rates following the Reserve Bank's announcement of another rise in the Official Cash Rate.

ANZ said it would increase its floating and flexible home loan rates by a quarter of a percentage point from Monday, bringing the floating rate to 6.25 percent.

It said while some home loan customers will be paying more, five times as many customers will benefit from higher interest on savings.

Next hike tipped for June

The Reserve Bank last increased the Official Cash Rate on 13 March, pushing it from a three-year long record low of 2.5 percent to 2.75 percent.

In March, the central bank forecast a benchmark interest rate of 3.75 percent by the end of this year and 4.75 percent by 2015. Some analysts say mortgage rates could rise to 8 percent in the next couple of years.

First NZ Capital economist Chris Green told Radio New Zealand's Nine to Noon programme the market is expecting the next rise in June.

Council of Trade Unions said say another rise in interest rates is bad for the economy and hurts workers and exporters. CTU economist Bill Rosenberg said the Government and the Reserve Bank should focus more on reducing housing costs.