29 Jul 2010

Rate rise will hurt, say businesses

7:57 pm on 29 July 2010

The increase in the Official Cash Rate will hurt, say business groups.

The rate has risen to 3%, but Reserve Bank Governor Alan Bollard says future increases will be more moderate than expected.

The Manufacturers and Exporters Association says the cash rate rise will stifle export growth.

Chief executive John Walley says the Reserve Bank should have used other means to deal with inflation, rather than measures that tend to lift the exchange rate.

Canterbury Employers' Chamber of Commerce chief executive Peter Townsend says the recovery is slower expected, and the cash rate increase won't help businesses.

He says Dr Bollard had good reasons to increase the cash rate, but he does not think the economy is strong enough to keep pushing up interest rates.

Business New Zealand chief executive Phil O'Reilly says increasing the rate will have an impact on business confidence. But, he says, business will be reassured by Dr Bollard's comments about the subdued domestic economy.

Earlier, Mr O'Reilly said it was hard to argue with the logic of what the Reserve Bank was doing. But the drawback of an increase in the rate would be less propensity for business to hire in the next few months.

The Northern Exporters and Manufacturers Association says it would have preferred no rise. Chief executive Alisdair Thompson says he would like to see the rate stay at 3% for some time.

Council of Trade Union economist Bill Rosenberg also believes the main impact of a rise would be on confidence. He said there will be a risk of returning to recession.

Dr Bollard catalogued a range of factors for the increase.

Dr Bollard said the world recovery remains fragile and demand in New Zealand was subdued. However, the New Zealand economy was still growing.

Dr Bollard also noted that the pace and extent of further increases in the rate would be more moderate than previously expected.

Financial markets expect rate rises from at least two of the remaining three rate reviews this year. The rate was previously 2.5% from 30 April, 2009 until 10 June, 2010, when it was raised to 2.75%.

Bank statement

In a statement, Dr Bollard said:

"While the outlook for economic growth has softened somewhat, it is still appropriate to continue to reduce the extraordinary level of support implemented during the 2008/09 recession.

"The world economy continues its fragile recovery. Trading partner growth has turned out stronger than we predicted, however, future prospects for growth have deteriorated. While still at high levels, our commodity prices have moderated.

"In New Zealand, domestic demand is subdued. Households are cautious, with retail spending growing only modestly, housing turnover in decline and household credit growth weak.

"While this caution has been evident for some time, the recent slowing in net immigration will act to further dampen consumer spending. Business investment remains very low, with corporate lending continuing to be subdued.

"The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand's economic outlook and moderation in our export commodity prices.

"Overall, we continue to predict respectable near-term GDP growth, with manufacturing confidence remaining elevated and forestry exports continuing to expand.

"An eventual recovery in business investment will assist growth over the medium term.

"Annual CPI inflation has been near 2% for the past five quarters. As the economy grows, inflationary pressures are expected to pick up.

"Given this, some further removal of monetary policy stimulus is appropriate at this stage.

"Even after today's move, the level of the OCR is still very supportive of economic activity.

"The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement. Our policy assessment will be continually reviewed in light of economic and financial market developments.

"The coming increase in the rate of GST and other government-related price changes are likely to temporarily push annual CPI inflation above 3%.

"The Bank does not expect this price spike to have a lasting impact on inflation.

"However, the price and wage setting behaviour of firms and households will be monitored for evidence of any increase in inflation expectations."