Business confidence survey suggests further rate rises

By NZPA

Tuesday 10th April 2007

Home owners could be in for another mortgage interest rate rise after the Quarterly Survey of Business Opinion (QSBO) released today revealed ongoing inflationary pressures in the economy.

The survey published by the New Zealand Institute of Economic Research (NZIER) showed that while firms are positive about their own outlook they are more gloomy about the general business situation.

It also showed that companies are raising prices, operating in a tight labour market and continuing to run at near capacity, all of which implies increased inflationary pressure.

"The survey result suggests the Reserve Bank (RBNZ) may have difficulty constraining inflation with just the one interest rate rise this year," NZIER director Brent Layton said.

The QSBO was completed just after the RBNZ raised interest rates on March 8 and that may have affected sentiment about the overall economic outlook.

However, economists are divided about whether the survey will be a catalyst for another rate rise.

Goldman Sachs JBWere expects another 25 basis point hike in interest rates on April 26 and said any more data like today's survey will increase the probability of a hike in June.

But ANZ said that while the QSBO was an "unfriendly read" for the central bank it did not contain sufficient justification for an interest rate hike in April.

"The most worrying indicator was further tightening in the labour market," said Goldman Sach JBWere economist Shamubeel Eaqub.

A net 41% of firms reported it is harder to find skilled labour, up from a net 29% in the last survey.

A net 27% of firms increased selling prices in the past three months. This is up from a net 21% in the December quarter.

Capacity utilisation is little changed at 91.8% from 91.7% in the December quarter, but is historically high.

Fifteen percent of firms surveyed in the March quarter expected a deterioration in the general business situation in the next six months in an unadjusted measure of confidence.

This was a turnaround from the last survey when a net 3% expected the general business situation to improve.

NZIER said the deterioration in this measure was reflected in all regions and business sectors and firms in the North Island recorded the most sizable decline.

Seasonally adjusted, a net balance of 3% of firms expected the general business situation to deteriorate in the next six months.

In the last survey a net 7% expected a deterioration. But the numbers are well down from the net 72% expecting a deterioration in December 2005.

Seasonally adjusted, the number of firms reporting an increase in their own activities was a net 11%. That was an improvement from the last quarter when the number reporting an increase was 6% more than the number reporting a decrease.

NZIER said that higher optimism among New Zealand manufacturers in the December survey was short-lived.

In the latest survey a net 23% of New Zealand manufacturers expected the general business situation to deteriorate.

But the outlook for building construction firms for the next three months is more positive than their reported experience over the last three months.

A balance of 2% reported an increase in output in the March quarter, up from 3% who reported a decrease in the December quarter.

Building materials suppliers are positive, with a net 31% expecting to increase their output compared with the net 4% that actually increased output in the March quarter.

A net 12% of firms intend to increase staff in the next three months.

A net 77 % of financial services firms expect interest rates to be higher over the next 12 months compared with the year just gone.

"Today's survey will do nothing to alleviate the RBNZ's concerns about ongoing inflation pressure in the economy," said ASB Treasury economist Daniel Wills.

"Whilst our current expectation is that the RBNZ will be on hold when they meet next in April, today's survey will contribute to an ongoing tightening bias from the central bank and the risk for rates lies firmly to the upside," he said.

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