Brash gets all-clear to raise rates

Reserve Bank governor Don Brash was today given the all- clear to hike rates after figures showed inflation was beating a steady path towards the outer orbits of the bank's target range.

Inflation, as measured by the Consumer Price Index (CPI), rose by 0.6 per cent in the quarter ending March 2002, taking annual inflation to 2.6 per cent.

That's down slightly on average private sector forecasts of 0.8 per cent for the quarter and 2.8 per cent for the year, but is still on the high side of the RB's 0-3 per cent target band.

With recent data indicating the domestic economy is growing at a healthy clip, Dr Brash will be keen to keep inflation in check with at least a 25 basis point hike in the Official Cash Rate (OCR) to 5.25 per cent at tomorrow's 9am meeting, economists said.

However, today's figures put paid to a possible 50 point rise.

"It will diffuse any thinking of 50 (basis points) pretty well, but we're looking at 25 tomorrow, and at least the same in May," UBS Warburg chief economist Robin Clements said.

Growing expectations that businesses will hike prices to cover higher fuel costs stemming from the Middle East crisis, will also be weighing on Dr Brash's mind.

The Institute of Economic Research's Quarterly Survey of Business Opinion last week showed a net 32 per cent of companies expected to raise prices in the next three months.

"Next quarter, inflation is likely to rise even further when we get the delayed impact of the petrol prices. It will be somewhere up around the 2.9 per cent to 3 per cent mark -- near the RB's target," Westpac Institutional Bank treasury economist Nick Tuffley told NZPA.

"Even though today's number is lower than they expected when they did the forecast last month, they are going to be very wary of the fact that inflation will rise further through the rest of the year."

The RB forecast a March quarter CPI number of 0.9 per cent in last month's Monetary Policy Statement, with annual growth picked to reach 3 per cent.

Today's rise in the CPI index was driven by spiralling food and housing costs.

The food group made the single biggest upward contribution for the third quarter running, accounting for around a third of the overall index movement, Statistics New Zealand said.

The group rose by 1.2 per cent, propelled by a 3.2 per cent rise in fruit and vegetable prices. That was due mainly to an unseasonally wet January in which fruit and vegetable prices leapt 8.1 per cent.

While the RB is willing to look through one-off seasonal factors like weather-affected produce prices, increased pressure in the housing sector was more difficult to ignore, economists said.

- NZPA