New data may keep mortgage rates down

The odds of home mortgage rates rising next year took a hit today from news that the economy expanded at half the pace expected in the September quarter.

Reserve Bank governor Alan Bollard warned this month that he would raise rates in the new year if economic data surprised on the upside. Today it surprised on the downside.

The New Zealand economy expanded by 0.3 per cent in the September quarter, less than the 0.6 per cent expected by financial markets and the 0.7 per cent forecast by the central bank.

"The domestic economy is now in a technical recession and the export recovery looks far from assured," Shamubeel Eaqub, economist at Goldman Sach JBWere, said.

But economists cautioned against getting carried away with the idea that a weak economy meant lower interest rates.

"The composition of today's result is stronger than the headline suggests," said ANZ economists.

The weakness in the September quarter was in part because companies ran inventories down.

Also, the GDP data conflicted with other economic reports, making for a confused economic picture as the year ended.

"The Reserve Bank has some breathing space, but the risk of higher interest rates in early 2007 remains significant," Westpac economists said.

Dr Bollard gave borrowers a backhanded Christmas present this month by leaving the Official Cash Rate on hold at 7.25 per cent.

Some economists had expected him to raise the rate, which has been unchanged all year, to try and squeeze New Zealand's 4 per cent annual inflation rate lower.

"Whilst today's report does not advance the case for a further hike in rates next year, in our view it does not detract from the case either," Deutsche Bank economists said.

Goldman Sachs expects the currently tight monetary conditions to continue. It doesn't see an easing in interest rates until September next year.

Statistics New Zealand (SNZ) said the annual growth rate was 1.4 per cent in the year ended September, down from 2.5 per cent in the year ended September 2005.

If the latest quarter is compared with the same quarter a year ago the annual rate was 1.3 per cent.

SNZ said domestic spending decreased by 0.2 per cent in the quarter. The decline was attributed to reduced investment in inventories and a reduction in non-residential building investment.

"Domestic spending has fallen in three of the last four quarters, resulting in annual growth (in domestic spending) reaching a five-year low of 0.4 per cent," SNZ said.

SNZ said service industries continued to provide much of the impetus in the New Zealand economy, increasing 0.9 per cent in the September quarter.

"The finance, insurance, and business services group, together with the transport and storage group, and communications industries, contributed strongly to this quarter's growth," SNZ said.

Offsetting this was a 1 per cent fall in manufacturing activity in the quarter.

The New Zealand dollar was at US69.60c in afternoon trading after falling on the data. The currency has been trading at 11-month highs and threatening the US70.00c level.