OCR rise a 'huge mistake'

20:41, Jun 17 2014
Shamubeel Eaqub
SHAMUBEEL EAQUB: "One of the biggest issues of this generation is the widening gap between the haves and have-nots."

Interest rate rises aimed at cooling the Auckland housing market will hammer New Zealand's towns and provinces, a leading economist says.

Reserve Bank governor Graeme Wheeler last week raised the official cash rate 25 basis points to 3.25 per cent, the third increase since March, when he started lifting the rate from its low of 2.5 per cent.

New Zealand Institute of Economic Research chief economist Shamubeel Eaqub said raising the OCR was a "huge mistake" that would punish the provinces, many of which were struggling economically.

He told an investment conference in Auckland today that growing inequality between regions was an "elephant in the room" that was being ignored by policymakers.

He said New Zealand's growth, which the Reserve Bank is predicting to be 4 per cent a year, was being driven in the first half of this year mostly by Auckland and Canterbury, and many other areas were stagnating or going backwards.

House prices in Auckland had risen 20 per cent in real terms since 2007, with prices up 13 per cent in Canterbury and 7 per cent in Wellington.


However, prices in the rest of the country fell 21 per cent in real terms during the same period.

While Auckland had had the fastest jobs growth over that time at 4 per cent, some areas, such as Whanganui, had at least 10 per cent fewer jobs now than in 2007.

"Kawerau is the poorest locality in New Zealand," Eaqub said.

"The median income there is something like $25,000 for a household. If you go to Auckland's eastern suburbs, the median income is $120,000.

"The gaps opening up in New Zealand are really big across geographical, race and education lines.

"One of the biggest issues of this generation is the widening gap between the haves and have-nots."

The decline in the regions was "structural rather than cyclical" through demographic and economic factors such as the ageing population and the loss of manufacturing jobs.

"Manufacturing has been in decline since 1966," he said. "We have fewer manufacturing jobs than in 1946 in absolute terms."

He said raising interest rates could widen the geographical gap, with the export-dependent regions having to deal with a higher New Zealand dollar.

"Raising rates is a huge mistake at a time inflation is incredibly low and you're only doing it because of the housing market in Auckland," he said.

"It scares the hell out of me because the collateral damage rises with each increase. You risk tipping them [the regions] into recession."

Eaqub warned of the risks to the New Zealand economy from the export sector becoming increasingly reliant on a small number of countries, particularly China.

"New Zealand had $5 billion export growth in the last five years and exports to China grew $7 billion in that time," he said.

"If it wasn't for China we would be going backwards."