Between the lines - Gurus bet Brash will push up rate soon

By BRIAN FALLOW

There is an overwhelming consensus among market economists that the Reserve Bank will raise its official interest rate another quarter of a per cent to 6 per cent next Wednesday.

The bank's March 15 monetary policy statement foreshadowed a further rise of 50 basis points in May.

But since then we have had the news that the economy expanded 2.2 per cent in the last quarter of 1999, more than twice as fast as the bank forecast.

Governor Don Brash was seen as reinforcing expectations of a more aggressive tightening last week when asked about the implications of the GDP surprise.

"On the face of it the whole market can see there may be more work for monetary policy to do over the next few months than seemed likely a month ago," he said.

Even so, economists at the National Bank and WestpacTrust doubt that Dr Brash needs to, or will, raise rates again next week.

What are the factors that make a difference between the way the inflationary outlook appears now and the way it looked on March 15?

Apart from the GDP data, there was the news that import prices - which had been surprisingly wellbehaved given the weak dollar, probably because of intense competition among retailers - jumped over 5 per cent in the last three months of 1999.

On the other hand, retail sales, excluding petrol, have been flat, and the exchange rate has firmed around 3 per cent on a trade-weighted basis.

For National Bank chief economist Brendan O'Donovan, that does not add up to a case for the Reserve Bank to depart from the course it set last month - especially when you consider how much of the December growth figure reflected short-lived factors the bank should ignore in setting policy.

Much of the 4.7 per cent GDP growth notched up in the second half of last year came with the spring, he says.

Agricultural output was not only bouncing back from the previous season's drought, but benefited from unusually favourable growing conditions.

The downstream effects were felt in the manufacturing sector, which includes dairy factories and transport.

Altogether, Mr O'Donovan reckons, that accounted for 1.6 of the 4.7 per cent.

He attributes a further 0.3 to 0.5 per cent to another one-off factor - the precautionary building up of stocks ahead of Y2K.

That boost will unwind in the first half of this year, while the agriculture boom has passed as weather conditions have returned to normal, he says.

If Mr O'Donovan is right, the Reserve Bank has time on its side.

We will find out on Wednesday if it sees it that way.