Future looks less rosy

Inflationary pressures and higher interest rates to counter them are the price to be paid, presumably, for having a rock-star economy. The first instalment, announced on Thursday, was the first increase for several years in the official cash rate (by 25 basis points to 2.75 per cent). The ANZ followed by similarly raising its floating and flexible home loan rates. Finance market experts expect a run of rate increases over the next two years and the Reserve Bank's latest projections show 90-day rates (now nearing 3 per cent) rising to 5.2 per cent by March 2017. A longer-term 2 per centage point rise in rates by one reckoning would require a borrower with a $500,000 mortgage to budget $7500 extra for repayments each year. Waikato's rural economy will be affected, too. Farm export returns will be crimped by the strengthening exchange rate that accompanies higher interest rates and interest is a major farm expense. The extra projected interest costs - if realised - would trim around $500 million a year from farm incomes nationwide.

On the positive side, higher interest rates are good news for savers, especially those who rely on interest incomes to live, and a higher exchange rate makes imported goods cheaper for consumers. There are many more savers than borrowers and the ANZ raised the rate earned by savers by as much as it raised lending rates. Citing Reserve Bank projections in Parliament on Thursday, Economic Development Minister Steven Joyce put a positive spin on things. GDP growth had strengthened over the past 18 months and was become increasingly broad-based. The Reserve Bank was forecasting strong job growth over the next four years. It was within the context of a faster-growing economy - he said - that the official cash rate had been raised from a record low level.

Mr Joyce should look harder. The Reserve Bank's projections show GDP growth peaking at 3.5 per cent in 2014/15, then slipping to 2.4 per cent the following year and to 2.3 per cent in 2016/17. Annual employment growth similarly falters - it is projected to be below 1 per cent in 2015/16 and 2016/17 - and the unemployment rate over the projection period at no point falls as low as it was when the Key Government took office in 2008. Rock stardom is looking discomfortingly short-lived.

Waikato Times