Economists question need for OCR increase

Craig Myles
Craig Myles
The rise yesterday in the Reserve Bank's official cash rate has been labelled premature and a decision that will further hurt New Zealand's small and medium-sized enterprises (SMEs).

Reserve Bank governor Alan Bollard said the economy had entered its second year of recovery, with growth becoming more board based as he lifted the rate 0.25% to 2.75%, the first rise in 13 months.

"The recovery in trading partners is continuing, with growth in Asia particularly strong. Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets."

Against that backdrop, New Zealand's export commodity prices had increased sharply over the past few months, boosting export incomes, Dr Bollard said.

However, Myles Wealth Management principal Craig Myles said he had only to talk to accountants and bankers to get a feel for what they were dealing with when considering the SME sector.

There was still a huge amount of deleveraging in the sector where debt facilities were either being denied, withdrawn or modified.

"My concern is that without access to funding, where will the robust growth come from?"

The same problem was being faced in the United States. Even though the US was a country of "big business", there were still many smaller businesses which were being denied access to money for expansion as the economy improved, he said.

The New Zealand economy was becoming one of two halves. There were signs of an export-led recovery but much of that was going out of Auckland.

Smaller enterprises were struggling to survive without bank funding, Mr Myles said.

There were suggestions that retail banks would immediately pass on the OCR increase to clients, something Mr Myles hoped would not happen.

There was already a "huge margin" between the floating home mortgage rate and a business lending rate. The profitability of banks suggested they did not need to pass on the increase.

"The worst case scenario would be reduced lending and increased costs. That could be where we are at," he said.

It was estimated yesterday that the rate rise would add $10 a week to a $200,000 mortgage repayment. About 30% of New Zealanders with mortgages are on floating rates.

Dr Bollard said the fact that bank funding costs were higher, long-term interest rates were higher than short-term interest rates, and a greater proportion of borrowers using floating mortgage rates, should all reduce the extent to which the OCR would need to be increased relative to previous cycles.

Council of Trade Unions economist Bill Rosenberg said business investment, with firms focused on paying down debt, continued to be a concern.

Banks were continuing the tighter lending criteria they established during the crisis. The rise in interest rates would not help. Renewed business investment was important for employment growth, he said.

"If the banks do not come to the party, the Government should be looking at establishing a specialist financial institution providing development finance."

The Reserve Bank should also be looking at alternatives to the use of interest rates to control inflation. Those could include use of conditions on loans and bank capital requirements, Mr Rosenberg said.

ASB economist Jane Turner expected the Reserve Bank to lift the OCR by 0.25% at each meeting, until it reached 5%.

Although the ASB expectation was lower than that implied by the Reserve Bank's forecasts of nearly 6%, it was still higher than market pricing for the end point.

"Given the risk posed by Europe, pricing in some risk of a pause in the tightening cycle is warranted and has been the reality in Australia, where meetings are more frequent."

There was still scope for market expectations of the peak of the OCR to increase when the risk environment was calmer, she said.

Labour finance spokesman David Cunliffe said the Government's unaffordable tax cuts for high-income New Zealanders made the rise in the OCR inevitable.

The central bank had warned repeatedly that a loose Budget would put more pressure on monetary policy to cool inflation.

"Although Budget 2010 limits spending on much needed social services like health and education, it hands out $4 billion a year in tax cuts that the country cannot afford.

"Alan Bollard simply cannot look past the inflationary impact of this tax windfall to a few and hence the rise in the OCR," Mr Cunliffe said.


AT A GLANCE
> OCR rises 0.25% to 2.75%
> The New Zealand dollar rises in value against major trading partners
> Rise could hurt small businesses

 

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