Inflation nudges Reserve Bank limit

By Rob Hosking

Friday 14th July 2000

A sizeable chunk of inflation on imports, a low dollar and tobacco tax hikes are likely to push next week's consumers price index figure toward the upper end of the Reserve Bank's 0-3% target range.

The CPI figures, out on Monday, are picked by most economists to be in the range of 0.7% to 1.0% for the June quarter.

The Reserve Bank has lifted its estimate from 0.3% to 0.8% following the tobacco-tax rise and also petrol-price rises flowing through from the weak dollar.

That would lift the annual rate to 2.8%, with the likelihood of it breaching the 3% ceiling by the end of the year.

The questions then arise as to whether the Reserve Bank will continue to lift interest rates and whether business confidence - already lower than it was before the 1991 and 1998 recessions - will continue to slide.

"We actually think it's started to turn around," Deutsche Bank economist Darren Gibbs said.

The latest evidence of that was this week's 10% hike in Australian consumer confidence, which follows a 7% lift last month. One of the problems cited by New Zealand firms has been an Australian economy stuck in a swamp caused by the GST implementation.

"If you look at that starting to shift, the general positive signs in the world economy and the continued low dollar, there could be quite a strong lift in business confidence quite quickly," Mr Gibbs said.

The resulting boost to pricing intentions and inflation would see the Reserve Bank stick firmly to its timetable of at least two further interest rate rises of 0.25% each for the remainder of the year.

Deutsche Bank believes the Reserve Bank should lift interest rates again by 0.25% when it reviews the official cash rate in August. Most bank economists are picking the central bank will hold off in August, although most believe further rate rises will occur later in the year.

National Bank takes a different view, however, and has publicly called on the Reserve Bank governor Don Brash to stay his hand for the rest of 2000.

"We think the business confidence issue is important, but our main agreement is there's no excess domestic demand in the economy and that's what we believe monetary policy should be targeting," the bank's treasury economist, Joselyn Stroombergen, said.

"Retail sales, construction, the real estate market and job advertisements all suggest there is still room to grow. And these are the things an interest rate increase will hit."

The main factors in price rises - petrol, excise taxes and the exchange rate - were not things a central bank should be targeting anyway, she said.

"Not unless it wants to end up chasing its tail."

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