By BRIAN FALLOW
Reserve Bank Governor Dr Don Brash raised the official cash rate the expected quarter of a percentage point to 5.25 per cent yesterday, and the accompanying statement gave little sign that he is any more concerned than he was last month about the inflation outlook.
Or any less concerned.
The statement said things had evolved much as expected. "It is clear from the December quarter GDP data that domestic demand has been growing strongly, and most information for the March quarter points in the same direction. Retail spending has been very strong and house sales suggest a buoyant residential property market. Both business and consumer confidence continue to be high."
The world economy also appeared to be continuing a gradual recovery, Brash said.
ANZ Bank chief economist, David Drage, said that, even so, the international environment was still difficult and provided sufficient uncertainty for the Reserve Bank to continue to exercise caution rather than haste in raising interest rates.
He expects the official cash rate to continue to be steadily increased, peaking at 6.5 per cent by December.
Although a 50-point move at any of the scheduled review dates could not be ruled out, Drage said, he did not believe such large movements were required.
WestpacTrust chief economist Adrian Orr thinks the next move will be 50 basis points on May 15, despite the "soothing words" of yesterday's statement.
"Our view is that domestic spending, inflation expectations, business confidence, capacity utilisation and the global outlook are all outpacing the Reserve Bank's expectations," Orr said.
The Bank of New Zealand also expects a 50-point increase in May, though it is a close call.
It its March monetary policy statement the Reserve Bank projected the 90-day bank bill rate to average 5.4 per cent over the June quarter and 5.8 per cent over the September quarter.
But the bill rate is already 5.75 per cent. "Any hike from here is likely to push it even higher," said BNZ head of market economics, Stephen Toplis. "Fifty certainly would."
Deutsche Bank chief economist Ulf Schoefisch said futures market pricing implied an 80 per cent chance Brash would pick up the tightening pace with a 50-point rate rise next month. Market pricing also suggested the official cash rate would reach 7 per cent early next year.
That is too aggressive, in the view of Schoefisch.
"International data has not been uniformly strong, the New Zealand dollar has firmed beyond the Reserve Bank's expectations and there are signs consumer confidence may be coming off its highs, consistent with the rise in mortgage rates and the prospect of falling farm incomes."
Alasdair Thompson, the Employers and Manufacturers Association (Northern) chief executive, lamented the Reserve Bank's "ultra-cautious" approach.
Council of Trade Unions economist Peter Conway voiced concern that interest rates were climbing at the same time that export returns were falling and the exchange rate rising.
Act leader Richard Prebble blamed the Government's "reckless" immigration policies and their effect on Auckland house prices.
Winston Peters called the move trigger-happy.
National's finance spokesman David Carter said it showed the need for sound economic policy which would boost the capacity of the economy to grow without generating inflation.
Brash expected to tug tighter on cash rate noose
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