KEY POINTS:
Strong retail sales data for February caused the dollar to jump yesterday and has money markets now viewing another interest rate rise as a question of when, not if.
When seasonally adjusted, sales were 1.9 per cent higher than in January and 6.3 per cent ahead of February last year, Statistics New Zealand said.
If the volatile automotive sector is excluded, the results were even stronger, up 2.3 per cent for the month and 8.2 per cent for the year.
When he raised the official cash rate to 7.5 per cent last month governor Alan Bollard warned further tightening might be required and a "return to a moderating trend in housing and domestic demand" was essential.
The money market reacted to yesterday's data by pushing up the exchange rate by a third of a cent to US73.4c and raising short-term wholesale interest rates.
The market now sees a 66 per cent probability that Bollard will raise the OCR again on April 26, according to Credit Suisse's swaps-based indicator, compared with a 40 per cent chance before the retail data were released.
An increase by the end of June is regarded as almost certain.
"For those desperately seeking relief from the unrelenting strength in the New Zealand dollar, today's figures will come as another body blow," said BNZ head of research Stephen Toplis.
"As long as there remains a perception that the New Zealand economy is going to maintain a head of steam and interest rates will continue to rise, the currency will remain well supported.
"Only when investors are convinced the economy is coming unstuck will the currency fall in any meaningful fashion," Toplis said.
The February sales figures predate last month's increase in the official cash rate and higher mortgage rates.
"But neither do they incorporate the recent increase in the minimum wage, the recent annual inflation adjustment to benefit payments, the expected further increase in wage inflation, the latest instalment of the Working for Families package or the good news for rural New Zealand that the dairy payout in the upcoming season is likely to be substantially higher," Toplis said.
ASB treasury economist Daniel Wills said the strong retail sales data made the April 26 interest rate decision a close-run thing, but he expected Bollard to err on the side of caution and buy a little more time to assess the impact of recent increases in the interest rate and the exchange rate on activity.
Deutsche Bank chief economist Darren Gibbs said Bollard would have to raise the official cash rate again, notwithstanding the recent rise in fixed mortgage rates.
This week's data, including the quarterly survey of business opinion which records strong rises in the inflation indicators, suggested he should do so sooner rather than later.
Toplis said the unexpected strength of the February numbers might reflect some factors which seasonal adjustment did not compensate for, like a marked improvement in the weather and a shift in school holiday patterns.
"Nevertheless, if you average the sales growth of the last three months you still end up with a 1 per cent a month increase."
February Sales
* Up 1.9 per cent on January.
* Up 6.3 per cent on February last year.
* Removing vehicle sector, retail sales were up 2.3 per cent for the month and 8.2 per cent for the year.
