KEY POINTS:
A massive spending spree in February will almost certainly be paid for with higher interest rates, probably as early as April 26.
The domestic economy is running so hot that Reserve Bank Governor Alan Bollard may administer some shock therapy with a half percentage point rate rise on
April 26.
Statistics New Zealand today reported national sales soared a seasonally 1.9 per cent in February, way beyond economists' forecasts of a 0.5 per cent rise.
Excluding car sales, sales were up a whopping 2.3 per cent against forecasts of 0.6 per cent.
That should be the final straw for Dr Bollard who even before today's data was considered on the brink of pulling the trigger on another rate hike.
He lifted rates last month a quarter of point to 7.50 per cent and financial markets now expect the rate to rise to at least 7.75 per cent on April 26. He is then likely to hike again to 8 per cent at the next review on June 8 if he doesn't pull a double rate rise immediately.
The New Zealand dollar, already near a two-year high, jumped almost half a cent to US73.5c on the news and in anticipation of Dr Bollard's likely response.
The kiwi is just one US cent away from its highest ever level since it was floated in 1985. It post-float high was US74.57c hit in March, 2005.
"That's a big number," said ANZ Bank chief dealer in New Zealand, Murray Hindley. "People were looking for a strong number anyway but that's exceeded the top end of the range.
"It's obviously going to put more pressure on the Reserve Bank at the end of the month. Certainly the market is starting to price in another hike at the end of the month."
Mr Hindley said there was now a chance Dr Bollard would hike rates twice, given the strength of the domestic economy.
Following today's announcement money markets were pricing a 66 per cent chance of the Reserve Bank hiking the official cash rate by 25 basis points, up from a 40 per cent probability yesterday, according to the Credit Suisse swaps-based indicator.
Goldman Sachs JBWere economist Shamubeel Eaqub said although the data predated the March interest rate increase and as such had very little forward-looking content, it did justify that move.
"We expect the Reserve Bank to remain committed to its housing obsession and deliver a hike on April 26."
Actual sales for the year to February were up 6.4 per cent against forecasts of a 4.1 per cent rise.
SNZ said the increase in February sales was broad-based with 19 out of the 24 retailing industries recording higher sales than in January.
The largest increases came from supermarket and grocery stores, other retailing, appliance retailing, cafes and restaurants, and automotive fuel retailing.
Car retailing and furniture and floor coverings were the only two industries with notable decreases.
Sales increased in all regions with South Island areas recording the largest percentage increases.
Even the manufacturing sector that has been hardest hit by the high dollar showed signs of strength today.
The seasonally adjusted Business NZ Performance of Manufacturing Index showed manufacturing grew at its strongest pace in 10 months in March as jumps in production and new orders offset the negative impact from a strong local currency, a survey showed today.
"While the New Zealand dollar is still the hot issue for manufacturers, steady results in overall PMI activity over the last year have been encouraging," Business NZ chief executive Phil O'Reilly said.
Mr O'Reilly said the strength of the New Zealand dollar was the most-mentioned negative factor facing manufacturers.
"On the positive side, some have still managed to increase offshore orders despite a high NZ dollar," he said.
This is likely to allay Dr Bollard's concern that he may tip the economy into recession, or send hundreds of exporters to the wall, by hiking interest rates too aggressively.
- NZPA