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NZIER sees longer pause on NZ interest rates, tepid growth

NZIER sees longer pause on NZ interest rates, tepid growth

By Paul McBeth

Aug. 31 (BusinessDesk) – The New Zealand Institute of Economic Research sees slow economic growth for the next couple of years and expects the Reserve Bank to keep interest rates low until June next year.

The economic think-tank says interest rate increases should be delivered “cautiously” with most mortgages on short-term or floating rates, and every 1 percentage point increase will add an extra $1.4 billion to the mortgage bill. The vulnerabilities in the global economy and the strong New Zealand dollar mean the Reserve Bank will probably keep the official cash rate at a record-low 2.5% until June next year, according to the NZIER’s quarterly predictions.

“The New Zealand economy is on the mend, but weak global growth is threatening the recovery,” principal economist Shamubeel Eaqub said. “An abrupt slowdown in the Australian economy, renewed recession fears in the U.S., and a spreading sovereign debt crisis in Europe will soften global growth.”

The NZIER expects economic growth of just 1.4% this calendar year, and 2.6% in 2012 as households keep repaying debt and refrain from spending too much. That’s softer than the Reserve Bank’s June forecasts for the same period, which were picking growth of 2.8% and 4.7% respectively. The Treasury was picking 4.7% growth for the 12 months through March 2012 and 6.4% expansion the following year in its budget forecasts.

Local data has been more upbeat in recent months, and until the downgrade of the U.S. credit rating by Standard & Poor’s earlier this month, central bank Governor Alan Bollard had been flagging the removal of the 50 point cut he made in response to the Feb. 22 Canterbury earthquake.

The global downturn is of particular concern to the NZIER, as it could hit national exports which have led New Zealand’s recovery on the back of record high commodity prices. The annual trade balance was a surplus of $1.31 billion in the year through July, according to government data.

The NZIER said the impact of the Canterbury earthquake hasn’t hit reported economic activity much, though other indicators suggest there have been some 26,000 private sector job losses and 2,000 people have left the area.

That comes a day after the government said it faces a bigger bill of $7.1 billion over the Canterbury quakes, extending this year’s budget deficit to $18 billion and wiping out the Earthquake Commission’s $6 billion Natural Disaster Fund.

(BusinessDesk)

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