Decision delicately poised as Bollard weighs uneasy times

By BRIAN FALLOW

Whether Reserve Bank governor Dr Alan Bollard will raise interest rates on Thursday is too close to call.

When asked to choose, a bare majority of economists - eight of 15 in the latest Reuters survey - pick that he will raise the official cash rate 25 basis points to 5.5 per cent. But they quantify the odds as 55 to 45.

Their ambivalence reflects the equivocal nature of the economic data since Bollard's earlier-than-expected rate hike on January 29.

The New Zealand dollar has risen since then and on a trade-weighted basis is 4 per cent above the average level the bank's December forecasts assume for the first half of this year.

With fresh evidence at the weekend of joblessness in the United States, further US dollar weakness/NZ dollar strength is on the cards.

But the housing market, cited by Bollard last time as a key source of inflation pressure, seems to have passed its peak with four consecutive monthly falls in house sales.

On the other hand, the wealth effect from last year's 22 per cent rise in house prices should keep underpinning household spending, and the continued strength of building consents suggests construction costs will stay an inflationary hotspot.

The net inflow of migrants rose in December and January, when adjusted for norman seasonal variations, in contrast to the strong declining trend evident since last May. But on an annual basis the population gain from migration is still in marked decline.

The monthly net flow of migrants, as the difference between two large numbers, is liable to be volatile. Taking the last three months' figures and annualising them implies an annual gain of 20,000, less than half the peak in mid-2003 and still a sharper downturn than the Reserve Bank forecast.

National Bank chief economist Dr John McDermott said the risk was that an interest rate rise now would have its main effect next year at the time the decline in net immigration and the drop in export incomes from a high dollar were hitting home.

On the other hand, firms' pricing intentions as reported to a business confidence survey were creeping up, as were their labour costs, he said.

The impact of the higher dollar was partially offset by strong commodity prices (in world price terms) and the robust outlook for trading partners' growth generally.

In addition, the economy next year would get a boost from the measures to be announced in May's budget to lift the incomes of families on low to middle incomes and make work pay.

For once, he said, it looked as if a fiscal stimulus would occur at the right stage of the economic cycle.

Westpac chief economist Brendan O'Donovan said Bollard had to steer a course between two risks.

One was inflation above 3 per cent and a possible house price bubble; the other was an implosion of growth next year under the combined weight of a sagging housing and construction sector and exports being squeezed by the New Zealand dollar.

In January Bollard seemed to see the former as the greater threat. "We believe it is the latter."

O'Donovan said the stark contrast in January between the New Zealand central bank hiking rates while its Australian counterpart adopted a wait-and-see approach was reflected in the New Zealand dollar rising against the Australian.

"That should warn the bank what could happen to the dollar if they hike again."