5 Aug 2010

Pressure on Reserve Bank not to raise interest rates

10:06 pm on 5 August 2010

Worse-than-expected unemployment figures have heaped more pressure on the Reserve Bank not to raise interest rates further.

The official unemployment rate rose to 6.8% of the workforce at the end of June, up from 6% in the March quarter. The consensus forecast among economists had been a rise of 6.4%, while the Reserve Bank had forecast 6%.

The case for the keeping the Official Cash Rate on hold was reinforced on Wednesday after yet another fall in dairy prices and the release of the unemployment figures on Thursday.

Social Development and Employment Minister Paula Bennett says an increase in the unemployment rate reflects a bumpy ride out of the recession and the rate is higher than the Government would have wanted.

However, the Labour Party says the figures show the economy is bouncing on the bottom of the trough, the Government has no plan for the economy and creating jobs and needs to come up with one.

An unemployment rate of 6.8% is well above the Reserve Bank's forecast. Last week, the central bank increased the benchmark interest rate by a quarter of a percentage point to 3% - the second consecutive rise in the rate.

There are three more opportunities for the bank to increase the Official Cash Rate this year. Deutsche Bank economist Darren Gibbs is predicting one more rise.

However, any more signs that the New Zealand economy is weakening between now and the review on 16 September could spell the end of further increases this year.

The New Zealand dollar fell half a cent to US73 cents after the unemployment figures were issued and on Thursday evening was trading at US72.95c.