Higher interest rates 'on the way'

Fairfax Media

RATE HIKE COMING: Consumer spending is set to return with "some vigour", but the Reserve Bank will also start hiking interest rates fast from April, according to Infometrics.

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Consumer spending is set to return with "some vigour" by the middle of next year, but the Reserve Bank will also start hiking interest rates fast from April, according to Infometrics.

The Reserve Bank is not expected to lift official interest rates at its next announcement on Thursday. The cash rate is expected to remain at 2.5 per cent.

But Infometrics is expecting four 50-point jumps in the official cash rate starting from April, while many other forecasters are picking a start in June.

The cash rate could hit 5 per cent by the end of next year, Infometrics says in its November forecasts.

With improving confidence and low interest rates, consumer spending will pick up rapidly next year, with economic growth rising fast to 3.3 per cent next year.

"Economic growth could top 4 per cent by the end of 2011," the forecasting group says.

Consumers would be more willing to spend because a recovery in the housing market would make people feel wealthier, interest rates were below average, petrol prices were steady and because unemployment was close to its expected peak.

"A bounce-back in household spending from mid-2010 is now on the cards," Infometrics says. As well, credit should be more freely available and a high dollar will make imports relatively cheaper.

However, while the recession was officially over, it would not feel like it for businesses selling domestically. Domestic economic activity, excluding external transactions, fell another 2.1 per cent in the June quarter and has shrunk 8.3 per cent from the peak.

Private consumption growth was expected to be just 0.4 per cent in the year to March 2010, but it would rebound to 4.1 per cent in the following 12 months, Infometrics says.

With the economy coming out of recession slowly at first, employment and hours worked would slip further, before picking up.

The outlook for export growth also remains weak, especially with a high New Zealand dollar.

But Infometrics warns that faced with a pick-up in household spending and a strong housing market recovery, the central bank would not keep official interest rates low till the latter part of 2010, as it has promised many times this year.

Leaving rates low for that long would risk over-stimulating the economy and promoting unsustainable growth.

"Doing an about-face and raising rates sooner, rather than later, is the lesser of two evils for the bank," Infometrics says.

The Reserve Bank would start lifting rates in April, rising in 50 basis point-jumps from 2.5 per cent to 4.5 per cent by September and possibly 5 per cent by the end of the year.

The Reserve Bank would be trying to avoid killing off a fragile economic recovery by raising rates too soon, but it would also not want to see an unsustainable speed-up in domestic spending.

KEY FORECASTS: The economy has emerged from a 15-month recession, with slightly positive growth in the June quarter, and the immediate outlook is much better. Economic growth forecast: 3.3 per cent year to March 2011 4.2 per cent year to March 2012 Why? Faster growth in household spending, driven by a recovering housing market and below-average interest rates. A high kiwi dollar will keep down import prices. Unemployment to peak at 6.7 per cent in 2010/11 March year. Interest rates: Official cash rate to rise from 2.5 per cent to 4.5 per cent between April and September Why? The Reserve Bank will want to avoid an unsustainable speed-up in spending No move expected by the Reserve Bank on Thursday.

Source: Infometrics

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