Wednesday 27th July 2011 2 Comments
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National Bank of New Zealand economists are calling for a rise in interest rates after the bank's latest business confidence survey revealed strong confidence and inflationary pressure in the construction sector.
Overall, a net 48 percent of respondents expected general business conditions to improve in 12 months' time in the June survey, which was little changed from a net 47 percent in May.
A net 44 percent of businesses anticipated an increase in activity, up five points on June.
National Bank economists said the "New Zealand story looks good" and was tremendously encouraging at a time of global uncertainty.
The construction sector remained the flagbearer for general business confidence with a net 60 percent of construction firms’ optimistic about the general economy.
Sentiment was strong across all the sub sectors, with business confidence residing well north of their historical averages.
But there was a danger that financial markets would "front-run" the story, resulting in a higher currency and expectations of higher interest rates.
National Bank economists argued that an emergency policy setting for the official cash rate (OCR) was no longer required. The OCR has been cut to 2.5 percent to stimulate the economy.
"The Reserve Bank of New Zealand’s June assumption of subdued construction cost inflation looks wishful thinking," the report said.
A net 50 percent of construction firms expect to lift prices. Overall, a net 29 percent of businesses expect to raise prices," the report said.
"Brace for interest rates to move up. Call it taking the OCR from being extraordinarily low to just exceptionally low."
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