15 Jul 2010

Economists divided on interest rate predictions

4:30 pm on 15 July 2010

Some economists say sluggish domestic demand won't hinder the Reserve Bank from raising interest rates further this year.

Retail spending remains constrained, rising a seasonally adjusted 0.4% in May, due to a jump in car sales.

Stripping out car and fuel sales, core retail spending declined 0.2%, led by a decline in spending in cafes and restaurants, and accommodation, which offset a rise in purchases of appliances.

Economists are divided on how the Reserve Bank should respond to the muted domestic demand figures.

Philip Borkin of Goldman Sachs JBWere says ongoing weakness in the domestic economy may force the Reserve Bank to pause its lifting the cost of borrowing sooner than expected.

Rise to 3.5% expected by end of year

But Deutsche Bank chief economist Darren Gibbs says a recovery is under way, underpinned by improving employment conditions, tax cuts and stronger farm incomes.

Mr Gibbs expects the benchmark interest rate, 2.75% at present, to increase to 3.5% by the end of the year.

Meanwhile, Real Estate Institute figures show house sales fell by nearly a quarter in June compared with the same period a year ago, even as house prices edged up slightly.

ASB Bank economist Jane Turner says it's more than just a winter slowdown, as interest rates rise and population growth slows.