Slow growth to keep rates on hold

Last updated 13:11 20/12/2012

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Sluggish economic growth is likely to keep interest rates on hold for a little longer, potentially adding more fuel to the overheated housing market.

Gross domestic product (GDP) figures released this morning show the economy grew just 0.2 per cent in the September quarter, much weaker than forecasts of 0.5 per cent. Figures for the June quarter were also revised down to 0.3 per cent.

ASB chief economist Nick Tuffley said the Reserve Bank was now likely to keep the official cash rate at its record low until December next year.

The cash rate, on hold at 2.5 per cent, strongly influences mortgage rates and investment returns.

"Another year of very low interest rates is likely to keep particularly the Auckland market very hot, and that will be one risk factor amongst others the Reserve Bank will have to keep an eye on," said Tuffley.

"The housing market in Auckland really doesn't need low interest rates- it needs construction."

It was construction that drove the bulk of the GDP growth, up 4.5 per cent, but much of it was related to the Canterbury rebuild.

ANZ chief economist Cameron Bagrie said the GDP data was bang on the Reserve Bank's previously signalled intention to lift rates at the start of 2014.

"What we know is the economy did a bit of a Lange, and stopped for a cup of tea in the middle of the year. The forward looking indicators look a little bit more constructive," he said.

Next year was likely to be better than 2012, but key challenges like the high kiwi dollar and fragile global situation remained, and the economy would likely move "in fits and starts", he said.

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