Experts split over bank's options

By BRIAN FALLOW economics editor

As the markets await acting Reserve Bank Governor Dr Rod Carr's first interest rate decision tomorrow, economists are divided on whether the domestic economy is strong enough to warrant picking up the pace of monetary tightening.

Market pricing implies about a 30 per cent chance that Carr will raise the official cash rate 50 basis points to 5.75 per cent, rather than keeping to the steady course of 25-point moves signalled in the March monetary policy statement.

Polls suggest market economists rate the chance of a 50-point move somewhat higher than that, but still as less than 50:50.

Since March, long-serving Governor Dr Don Brash has left the bank. His departure, with the earlier loss of Deputy Governor Murray Sherwin, is thought to have tilted the balance on the monetary policy committee in a more hawkish direction.

The hawks, calling for a 50-point move, can point to:

* Retail sales which grew 2.2 per cent in real terms in the March quarter. The latest Colmar Brunton survey found a net 25 per cent of consumers optimistic. This is consistent with annual private consumption growth of over 4 per cent, say Bank of New Zealand economists.

* House sales are through the roof, up 44 per cent in the March quarter compared with the same period last year.

* The labour market is tight; the participation rate is at a record high.

* The consensus of forecasts for growth in New Zealand's trading partners over the next two years is higher than it was in March.

* Inflation expectations have crept up and are getting close to the top of the 0 to 3 per cent target band.

* Although the New Zealand dollar has appreciated, the effect may be more to rebuild importers' margins than to trigger lower consumer prices.

The doves, arguing for a 25 point move, can cite:

* Retail sales may have been up in the March quarter as a whole but they were down in the month of March.

* Dairy payouts next season will be well down on the past two seasons, taking some heat out of rural areas.

* Higher interest rates will catch up with the housing market.

* Since the March monetary policy statement, concerns about the strength of the United States' recovery have grown, as reflected in a 7 per cent fall in the Dow Jones and an 18 per cent drop in the Nasdaq.

* Demand for labour grew strongly but so did the supply, and wage inflation, in the private sector at least, is moderate.

* The New Zealand dollar is 3 per cent higher, on a trade-weighted basis, than the bank was expecting for the second half of the year, doing some of its tightening work for it.