Imports a nudge for interest rates

By BRIAN FALLOW

While exporters grimly watch the relentless rise of the New Zealand dollar, retailers and their customers have been cashing in on the cheaper imports it delivers.

Retail sales figures out yesterday were every bit as strong as expected and have reinforced expectations that Reserve Bank governor Alan Bollard will start raising interest rates soon - possibly as soon as December 4, but almost certainly by the first quarter next year.

Adjusted for seasonal effects, sales rose 2.3 per cent in the September quarter. Statistics NZ splits that into a 2 per cent increase in volumes and a 0.3 per cent rise in prices.

The modest level of overall price increases reflects the fact that prices fell in 10 of the 15 store types, especially in those with a high concentration of imported products such as domestic appliances, clothing, footwear and petrol.

Sales were 6.1 per cent higher in real terms than in the September quarter last year. Reflecting the strength of the housing market, the increase was led by durable items such as appliances (up 14.5 per cent), hardware (9.5 per cent), furniture (8.2 per cent) and vehicles (7.9 per cent).

But Warehouse executive David Wilson dismissed the annual growth of 17.8 per cent recorded for the department-store sector as implausible.

The Bank of New Zealand's head of market economics, Stephen Toplis, said the disinflationary effects of the stronger dollar had further to run.

"Normally there is a lag of nine to 15 months for a currency move to flow through into retail prices. Twelve months ago the trade-weighted index was only 54 [compared with 64.5 yesterday]."

The retail figures carried a mixed message for the Reserve Bank, he said.

"The volume growth implies higher [interest] rates but the impact of the exchange rate suggests lower ones. We'll stick with a March hike for now but wouldn't be in the least surprised if the Reserve Bank bit the bullet in December."

Toplis said the timing of the increase would largely depend the exchange rate movement.

Deutsche Bank, which has been at the dovish end of the forecasters' spectrum - arguing that Bollard could afford to wait till late next year before raising rates, given the strength of the currency - now expects him to start tightening in the first quarter of 2004, with March slightly more likely than January.

This reflects the strength of recent data on the domestic economy - retail sales, jobs growth and the Auckland housing market - as well as the hawkish nature of Bollard's comments last month.

But Deutsche Bank chief economist Ulf Schoefisch continues to doubt that an early tightening is necessary, citing indicators that growth is likely to moderate.

"In particular, lower net inward migration is expected to lead to weaker growth in domestic demand, while the strong New Zealand dollar is offsetting the benefits to the export sector from a stronger global trading environment."

Raising interest rates could also push up the exchange rate.