Rates rise tipped despite new gloom

By BRIAN FALLOW

WELLINGTON - Reserve Bank Governor Don Brash is still expected to raise interest rates tomorrow, despite plunging share prices, falling business confidence and subdued inflation in the first three months of the year.

The consumers price index rose 0.7 per cent in the March quarter, making 1.5 per cent for the year, in line with market and Reserve Bank expectations.

Much of the increase was caused by seasonal factors or influences that are now likely to abate. But price rises were widespread - involving almost 70 per cent of the goods and services in the CPI.

More than a third of the quarter's increase was food prices, mostly a 7 per cent rise in fruit and vegetables. But it follows three quarters in which they fell, and they are still 0.2 per cent lower than a year ago.

Petrol contributed nearly a quarter of the rise but with international oil prices having fallen, this is likely to be reversed in future quarters.

The costs of building or buying a home pushed the index up a similar amount, but recent falls in new dwelling consents suggest that pressure should abate.

The 10.5 per cent rise in tertiary education fees represents another fifth of the increase. A 9 per cent fall in international airfares (a seasonal effect seen in four of the past five years) was the main downward contributor. But for it, inflation would have been 0.9 per cent in March.

Deutsche Bank chief economist Ulf Schoefisch said the CPI result would have had a neutral impact on the Reserve Bank's decision whether to raise rates tomorrow.

Given that both December GDP and import price figures had been significantly stronger than the bank expected, and the "pretty horrible" cost and pricing intention data from the Institute of Economic Research's quarterly survey of business opinion, Mr Schoefisch still expected the official cash rate would be raised 25 basis points.

The survey recorded a sharp drop in headline confidence, with a net 3 per cent of firms expecting the general business climate to improve over the next six months, down from 21 per cent three months ago.

"Overall, it is a picture of growth slowing but not stopping," said institute director Alex Sundakov. "While firms' own activity is strong, profitability is being squeezed. It is not translating to the bottom line."

Firms reported the most widespread rise in costs since 1990, when inflation was running at high levels. A net 31 per cent expect to raise prices over the next three months, while a net 22 per cent said they did so in the past three months.

Capacity utilisation, an indicator closely watched by the bank, is back at levels seen during the peak of the last business cycle and is reflected in a firming of investment intentions, with all sectors planning extra spending on plant and equipment in the next 12 months.

Despite the fall in confidence, companies are positive about their own activity, but many will reduce staff over the next three months.

That testified to a degree of risk aversion on the part of businesses, Mr Sundakov said, caution which the turmoil on world sharemarkets might exacerbate.

ANZ Bank chief economist Bernard Hodgetts said that because of the ructions in the equity market there was perhaps a case for the Reserve Bank not to raise rates tomorrow.