Business / Money

Interest rate rises - Reserve Bank has time, 'shouldn't go too early' - economist

11:08 am on 5 August 2021

Expectations are that the Reserve Bank will cement in an interest rates rise in coming weeks, RNZ business editor Gyles Beckford says, but economist Shamubeel Eqaub is warning against going "too early like it did after the global financial crisis".

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The Reserve Bank is expected to start raising the official cash rate this month - and that among other factors what is driving the expectation of a rates increase.

"The job numbers ... 4 percent unemployment, big falls in underutilisation, some strength in wages, all pointing to an economy of overheating. And that's seeing economists in inflation markets cementing in a rates rise from the Reserve Bank in a couple of weeks time, and suggesting they'll go sooner and harder on rate rises generally," Beckford said.

Economist Shamubeel Eaqub told Morning Report he thought it was a good news story in that the economy had done well through Covid-19.

He did not expect there to be an interest rate increase that would have a cooling impact on the economy.

https://www.rnz.co.nz/national/programmes/morningreport/audio/2018806921/reserve-bank-should-hold-off-on-raising-interest-rates-eaqub "The Reserve Bank has time. It shouldn't go too early like it did after the global financial crisis" - Shamubeel Eaqub

"We've had, you know, some of the lowest cumulative restrictions in the OECD, [the] economy's, in good shape, and we're having a big big catch up from the wage increases that didn't happen in a sort of last year because of all the Covid-related caution," Eaqub said.

Shamubeel Eaqub. Photo: Supplied

"I guess it's more when you're looking forward. How much work can't happen because we don't have workers and how much will conditions change with interest rates and the like. Because inflation is picking up very, very quickly.

"I know there's been kind of this incredible chatter that the Reserve Bank must raise interest rates right now, but here's a bit of context. The number of unemployed people has fallen by about 3000 people from this time last year, but official ... job seeker numbers, they're still up nearly 45,000 from from pre-Covid, and particularly for Māori, for younger people, there is in fact there still a lot of slack in the labour market, and when you look at the wage increases, that's really making up for the lost ground last year.

"So, yes, it's going to build over the next little while, but that pressure is still to come. The Reserve Bank has time. It shouldn't go too early like it did after the global financial crisis.

"The other thing that's going on - we're in a very strange environment right now because there are parts of the economy that are doing it pretty tough, but there are other parts that are actually growing really really fast, and we've in fact had some of the strongest productivity gains in the last six months ... these are good things. It doesn't mean that it's widespread.

"There are lots of sectors where the lack of access to label just means that we can't do work - think about things like our infrastructure projects."

The country did not have "outrageous" inflation, Eaqub said.

"When you think about price increases, a lot of it was due to fuel and rent. So we have big problems when it comes to our housing market, but in terms of widespread inflation pressures, they are still to come ... we've got a closed border so the usual pressure release from integration that keeps wages moderated - that is not going to happen into the future, and so we are going to see these wage inflation pressures pick up more much more over the course of the next couple of years and that will feed through to inflation.

"But the the Reserve Bank has time on that on its side. Why would you go so early when the Delta variant is still creating heavy out in the global economy, which still poses risks for New Zealand?"

"Yes we have a big housing boom. Yes, we have a complete shortage or or supply shock in terms of the labour market because the borders are closed. It doesn't mean the economy is in amazing shape and that things are overheating. I'd say things are sort of just back to the trend that we had pre-Covid, so it's not like we're kind of in in this kind of this 2007, 2008 period we had before the global financial crisis when the economy is running so hot that we simply couldn't keep up. We're not quite there yet.

"You know the net impact of these very tiny mortgage rate changes is very small, but the changes of LVR restrictions is massive. It's the difference between whether you can borrow $1 million or $800,000. This is really big stuff, so you know, I think the restrictions that the Reserve Bank removed, particularly for investors on LVRs, that was the big mistake when it comes to policy that needs to be undone, and that would suck that money out of that second hand housing market.