Economists tip no rise for now

By BRIAN FALLOW

Market economists are unanimous that Reserve Bank Governor Alan Bollard will leave the official cash rate on hold at 5 per cent at Thursday's review.

In a Bloomberg poll of 14 economic forecasters the median expectation is that it will be the September quarter next year before he raises rates.

The money markets, on the other hand, are betting that the tightening will begin before the end of this year and that 90-day wholesale interest rates will be 5.5 per cent by the end of March.

The divergence of views largely reflects disagreement about how long the disinflationary effects of a strong dollar will offset the inflationary effects of buoyant domestic demand.

The intensity of the arm-wrestling between the spending and earning sides of the economy was evident in last week's inflation data.

The bottom-line numbers were benign: rises of 0.5 per cent for the quarter and 1.5 per cent for the year, comfortably within the bank's 1 to 3 per cent target range.

But those outcomes split the difference - a widening difference - between the tradeables sector (goods imported or competing with imports or able to be exported) and the non-tradeables, or domestic, sector.

Non-tradeables inflation in the quarter was 1.3 per cent, making 4.1 per cent for the year, and in the tradeables sector, influenced by the exchange rate and negligible world inflation, prices fell 0.4 per cent in the quarter and 0.9 per cent over the year.

For example, households faced a 3.2 per cent increase in electricity prices and a 7.2 per cent rise in local body rates last quarter, but household appliance and furniture prices fell, 2 and 1.3 per cent respectively.

Deutsche Bank chief economist Ulf Schoefisch in economic forecasts published last week expects the opposing forces at work on the economy to gradually weaken.

The strong net inflow of migrants which has underpinned the domestic economy and especially the housing market is easing: of the 41,000 net inflow of permanent and long-term migrants in the year ended August, only 30 per cent occurred in the second half-year.

Schoefisch expects that slowdown to continue as a result of changes to immigration policy, a reduction in foreign students coming in and more New Zealanders going overseas as the global labour market improves.

The tradeables sector has had to contend with anaemic world growth and a rapid appreciation of the New Zealand dollar (up 25 per cent on a trade-weighted basis since late 2001), cutting exporters' incomes and increasing imports' share of domestic markets.

But the world economy is picking up and while Deutsche Bank expects the New Zealand dollar to rise further against a weakening United States dollar, it sees it softening against other currencies, leaving it little (1 or 2 per cent) higher than it is now on a trade-weighted basis over the next couple of years.

Commodity prices appear to have bottomed after a steep drop since the middle of 2001. Even in New Zealand dollar terms they have risen in the past two months.

But those are spot prices and spot exchange rates. Lags arising from marketing and currency hedging arrangements mean that the effects of the previous falls on farmers' and other exporters' incomes will continue to be felt for some time.

On the spending side of the economy, retail sales have proven stronger than expected, consumer confidence is high, and the housing market remains a hotspot - hot enough to spark some public fretting from the Governor.

But raising interest rates early, as the money markets are expecting, would risk a considerable downturn in overall economic growth, as the export sector is still weak, said Schoefisch.