A leading economist believes Alan Bollard is taking the wrong course for New Zealand by continuing to raise interest rates and is questioning the real level of inflation pressures.
Shamubeel Eaqub, from the New Zealand Institute of Economic Research (NIER), told NZI Business this morning that yesterday's Official Cash Rate rise was "expected but very disappointing".
"The Reserve Bank suggests that interest rates are currently supportive (of economic growth). This is simply not true," he said.
"If it was supportive we would see very strong growth in credit, we would see households and business spending and investing, why is that not happening?"
He said it is not happening because the interest rates that individuals, households and businesses face are actually relatively high for a recovering economy.
Yesterday the Reserve Bank hiked the rate by 25 basis points following a similar hike in mid June and pushed the OCR to 3%. It had been held at 2.5% for over a year.
The US, UK and euro zone all have their benchmark rates at 1% or under and even Australia - which has been somewhat immune from eonomic downturn - is only at 4.5%.
Eaqub said New Zealand's economy is much weaker than Dr Bollard will acknowledge and the Bank needs to hold the OCR now.
"We don't want the Reserve Bank raising rates further. That depreciates our currency, hurts our export sector, and damages our domestic economy which frankly is very very weak," he said.
He argues that the inflationary pressures the Bank is so concerned about are actually not that strong.
He said the pressures on household spending are coming from fixed expenses like rates, electricity and government charges so consumers are actually being forced to spend less on other goods and services outside of necessities.
"What we are seeing is a consumer sector that is very very subdued, we are seeing businesses that are not very confident, they are not investing. Really we don't have many ingredients for sustainable growth or overheated growth which might lead to long-term term inflation problems."
Eaqub maintains that in a recession, economies do not behave in the normal or expected manner and although surveys and expectations are pointing to inflation pressures it is not actually happening.
"This is a very important distinction. Expectations are not the end of everything, this is not what drives inflation, it is the real economy.
"If the economy does recover and inflation does pick up, let's raise interest rates then. Why are we hitting the economy now when the domestic sector is so weak...when business lending growth rate is going backwards, when the consumer sector is not really buying anything? What is the justification for making these people hurt more?" he asks.
Bollard said yesterday that he has factored in the weak domestic data but still believes the OCR at 3% is "very supportive" of economic activity.
Other economists, especially from the major banks, do support the OCR rise with Westpac even saying they were surprised at the change in tone from the RBNZ.
"We thought they could have retained much of the language of the June statement, instead they went for a complete rewrite that offered up a few surprises...That's a stronger reaction to a handful of softer short-term data than we would have expected," said Westpac's statement.
The next OCR review and Monetary Policy Statement is due in mid-September.