Thursday's interest rate rise will not be the last if New Zealand businesses start significantly hiking prices and wages, a Moody's economist warns.The Reserve Bank of New Zealand is expected to increase the Official Cash Rate by 25 basis points to 3 perc
Thursday's interest rate rise will not be the last if New Zealand businesses start significantly hiking prices and wages, a Moody's economist warns.
The Reserve Bank of New Zealand is expected to increase the Official Cash Rate by 25 basis points to 3 percent on Thursday, its second consecutive rise off a record low, as it tries to keep inflation in check ahead of expected further price rises.
Annual inflation of 1.8 percent is currently within the Reserve Bank's target range of an average 1-3 percent over the medium term. However, a rise in GST in October and expected price rises under the Emission Trading Scheme are expected to help push headline inflation above 3 percent this year.
"Surveys indicate inflation expectations are at the top end of the central bank's comfort level and could accelerate if firms begin to lift prices," said Moody's Analytics economist Matthew Circosta.
"Maintaining a monetary tightening bias is suitable at this stage as the central bank tries to rein in households' perceptions of future prices."
Interest rates have been kept low to help cushion the economy during a recession and to soften the effects of the global economic crisis, such as credit tightening.
An economic recovery will make it easier for companies to raise prices, and renewed difficulty in finding skilled workers was likely to lead to wage hikes.
"Even if near-term inflation expectations retreat, the central bank has little room to breathe and faces a tougher task managing steadily rising medium-term inflation expectations," Mr Circosta said.
Economists polled by Reuters are picking a 25-point rate rise on Thursday, and gradual increases to 4 percent by the end of March 2011.
