The New Zealand economy was recovering but dangers were clear and present, the New Zealand Institute of Economic Reform predicted in its June Quarterly Predictions released this morning.
"The current global financial, political and social turmoil are the key risks.
A gradual hiking programme from September would allow time to gauge the impact of the current risk flare, a preferable option to rushing rate increases that may have to be reversed," he said.
Most economists are picking the New Zealand Reserve Bank will lift the OCR on June 10 to 2.75% as it gauges that the economy is recovering.
The Reserve Bank of Australia is today expected to leave its official cash rate at 4.5%.
It raised the rate to 4.5% in May but also gave clear indications of a pause.
Mr Eaqub said the current global situation was the key risk to New Zealand firms, households and the economy.
The social unrest in Greece had shown how difficult real deleveraging could be.
New Zealand would be negatively affected if global growth slowed as a result of the European tensions.
It would be more difficult to borrow and would cost more.
"Lower global growth will reduce demand for our exports," he said.
At the weekend, media reports out of Europe started naming Spain as having a government in crisis.
Spain's socialist government, led by Prime Minister Jose Luis Rodriguez Zapatero, is seeing its political power erode as it struggles to chart a path out of deep financial trouble.
A package of austerity measures passed by only one vote in the Spanish Parliament's lower chamber late last week and the Fitch Ratings agency downgrading Spanish debt saw Opposition parties calling for new elections.
The austerity package aims to cut spending by 15 billion ($NZ27.1 billion) over two years by freezing pensions and cutting public servants' wages.
However, investors and lenders such as the International Monetary Fund are demanding that Spain reforms its labour market, overhauling hiring and firing rules and moving to find jobs for the long-term unemployed and the young.
Unemployment in Spain rose from 1.76 million in the second quarter of 2007 to 4.6 million in the first quarter of this year with more than 40% of Spain's available under-25s unemployed.
Union leaders have said if the Government implemented labour reforms without union approval, they could call for a general strike that could paralyse the country and cause deep unease in global markets.
Mr Eaqub said that in New Zealand, the economy was more fragile than met the eye.
While confidence measures were very optimistic, household spending was stagnant.
The economic boost from migration was fading as emigration to Australia accelerated.
Export performance was only beginning a broad-based recovery.
Until recently, much of the strength was concentrated in dairy and forestry, he said.
The institute believed the economy would stage only a subdued recovery.
The consensus expected economic growth of 2.8% and 3.3% respectively in the 2010 and 2011 calendar years.
"We are less optimistic. We expect a more subdued recovery at 2.4% and 1.8%.
"Our more cautious forecasts reflect the view that not all of the past interest rate cuts will be translated into economic growth."
Credit growth, the main link between monetary policy and economic activity, would still be weak.
From next year, interest rate increases would be accompanied by reduced government spending, Mr Eaqub said.
Together, those would slow economic growth.
Consumer price inflation would spike to about 5% early next year due mainly to a rise in GST, introduction of the emission trading scheme and increases in ACC levies.
"For many lower income households the tax cuts will be largely spent on living cost increases which will be compounded by rising mortgage rates," he said.
