14 Mar 2014

Economic growth 'not at risk'

10:32 pm on 14 March 2014

Rises in the benchmark interest rate will not hit the peaks of the past, the Reserve Bank deputy governor says.

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The central bank on Thursday raised the Official Cash Rate from 2.5 percent to 2.75 percent - the first increase in three years. The bank is forecasting a benchmark interest rate of 3.75 percent by the end of this year and 4.75 percent by 2015.

Assistant governor John McDermott said the OCR will not rise as as high as it has in the last economic cycle when inflation started to get away.

"People may remember that the Official Cash Rate got to 8.25 (percent) and that was mortgage rates up around 10 percent. That's an experience we really don't want to repeat."

Unions and manufacturers are worried the increase is premature and will cost workers and businesses.

Manufacturers and Exporters Association chief executive John Walley said further increases would affect the exchange rate, hurt exporters and stifle growth, while Council of Trade Unions president Helen Kelly said the rise was unnecessary at at time when the inflation rate is lower than last year.

"It will have a dramatic effect on the productive sector in terms of the high New Zealand dollar, in terms of stifling growth in areas where it's very tentative at the moment, Ms Kelly said.

Mr McDermott told Radio New Zealand's Morning Report programme the increases would not put the economic recovery at risk.

Economic growth rate is estimated at 3.3 percent in the year to March, and the deputy governor said that would rise to 3.5 percent next year, driven by high export prices, the Christchurch rebuild and the housing market.

Business New Zealand economist John Pask said the OCR rise was an appropriate measure for the future health of the economy. While increasing of the cost of capital may adversely affect businesses and householders, it was better to deal with inflationary pressures early, he said.