The Reserve Bank of New Zealand (RBNZ) should hold off raising interest rates until June 2012 due to an unstable global economic outlook and the high New Zealand dollar, the New Zealand Institute of Economic Research (NZIER) says.
The NZIER's view is half a year different than expectations from economists at New Zealand's major retail banks, who are picking a resumption in Official Cash Rate (OCR) increases from December 2011 as the Reserve Bank removes its March 50 basis point 'insurance cut' in the OCR, which currently sits at 2.5%.
If the OCR remained at 2.5% until mid-2012, that would mean floating mortgage rates, which are closely tied to the OCR, would remain lower for longer, while fixed rates would be determined by the market outlook for the New Zealand and global economies during the next five years or so through wholesale swap rates.
'Risks abound'
Releasing the NZIER's June 2011 Quarterly Predictions, principal economist Shamubeel Eaqub said although the New Zealand economy was on the mend, weak global growth was threatening this recovery.
"An abrupt slowdown in the Australian economy, renewed recession fears in the US and a spreading sovereign debt crisis in Europe will soften global growth. New Zealand’s economic growth will be slow," Eaqub said.
NZIER expected economic growth of 1.4% and 2.6% in 2011 and 2012 calendar years, respectively. This was consistent with a slow and gradual economic recovery, with continued deleveraging.
RBNZ should not hike rates for some time
The Reserve Bank should not raise interest rates while the global economy was so vulnerable and the New Zealand dollar so high, Eaqub said.
"We now expect the RBNZ to raise interest rates from June 2012 (versus March 2012 previously). Interest rate increases should be delivered cautiously, as most (83%) of mortgages are short term. Even a 1% point (100 basis points) interest rate increase will raise the annual mortgage bill by NZ$1.4 billion or 2.2% of annual retail spending," he said.
Canterbury impact becoming apparent
Meanwhile, the economic potential of the Canterbury region may be permanently smaller than before a series of earthquakes hit from September last year.
"The Canterbury earthquake has not affected recorded economic activity much. But other indicators suggest the impact is real and large: 26,000 private sector job losses and around 2,000 population loss through overseas migration," Eaqub said.
Global fears
NZIER was particularly concerned by the recent deterioration in the global economy.
"Exports had been a key support to the economy. A renewed global slowdown, particularly without the buffer from Australia, will weigh on export prices and volumes. Tensions in global markets will also see the NZD remaining higher for longer, further weighing on exports," Eaqub said.
(Updates with video interview with Eaqub)
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