Rate cut hard to justify

By COLIN JAMES

Business confidence and consumer confidence are heading down. The dollar is heading up and export earnings down. Retail sales growth is slowing. Time for an interest-rate cut?

No, is the general opinion among economists. There is not enough evidence yet to enable Reserve Bank governor Alan Bollard, who delivers his quarterly monetary policy statement tomorrow, to give vent to the easing bias he flagged in January.

Many economists say there is unlikely to be a rate cut before the next quarterly statement, in June.

Bollard himself in January talked only of possible "scope for a cut later in the year" and said that would depend on the exchange rate staying up or rising and evidence of "reduced pressures on resources and medium-term inflation".

The exchange rate has risen since January - by around 2.3 per cent on the trade-weighted index and 2.6 per cent against the United States dollar. And growth in retail sales and house sales began to slow over the summer. But evidence that this is a trend, not a dip, may not appear in time for the April 24 six-weekly monetary review.

Bank of New Zealand wholesale markets chief economist Stephen Toplis rates the chance of an easing at 50-50.

"The odds are moving towards an easing. But migration, retail spending and construction are still strong and before the Reserve Bank eases it will need evidence that at least two of those are slowing."

There was net inward migration of 5600 in January alone, which will sustain the pressure on housing and durables sales.

Retail spending was up 5.7 per cent in the year to December (though that was down slightly on the peak of 6.6 per cent in the 12 months to September) and house prices were up 10.5 per cent in January compared with a year earlier.

Overall economic growth for 2002 looks likely to come in at 4.2 per cent to 4.5 per cent.

Where the evidence favours an easing is in the external economy. The rising dollar has negated the recent recovery in some export prices and gloom continues to accumulate in the Northern Hemisphere. The prospect of war in Iraq adds to uncertainty.

Unions want a rate cut now. Council of Trade Unions economist Peter Conway said the bank should look through the strong housing and labour markets and take pre-emptive action to maintain domestic activity and ensure a soft landing from last year's strong expansion.

Conway accepts that a 0.25 per cent cut will not stop foreign financial market operators speculating in the dollar, a significant cause of its recent rise.

"But it might slow them."

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