14 Jun 2013

Early rate rise tipped if dollar stays low

11:29 am on 14 June 2013

An economist says the Reserve Bank could raise interest rates by the end of the year if the dollar stays lower for longer.

The Reserve Bank on Thursday left the Official Cash Rate unchanged at 2.5% and said it was unlikely to change until September 2014.

However, the prediction is based on the New Zealand dollar being much higher than its current rate.

BNZ economist Stephen Toplis says the Reserve Bank has based its assumptions that the dollar on the trade weighted index would average 77.4 over the next 12 months. At present it is 4.5% lower at just under 74.

Mr Toplis says the Reserve Bank will have to move sooner on interest rates if the dollar stays low.

"If you look at the central bank's scenario analysis, a much weaker currency would imply much higher interest rates than published in their track, so it's all to do with the currency from here on in.

"If the currency stays where it is, then expect significant interest rate increases and much earlier than published in the bank's forecasts."

Mr Toplis says the Reserve Bank has played down the strengths in the economy, but he says there are a number of factors pointing to higher inflation.

He says risks to inflation are rising quite aggressively due to ongoing strength in the housing market, expectations that the agriculture sector should bounce back from the drought, and the fact that business and consumer confidence remains strong."