Doubts and housing point to interest cut

By BRIAN FALLOW

Weak business confidence and fresh evidence that the housing market is coming off the boil reinforce expectations that Reserve Bank governor Alan Bollard will cut interest rates next Thursday.

Business sentiment as measured by the National Bank's survey stabilised this month, but at low levels.

A net 44 per cent of respondent firms expect the general business situation to worsen over the year ahead (42 per cent last month). Expectations of their own activity improved slightly: a net 9 per cent expect improvement, up from 7 per cent last month.

Other indicators in the survey are little changed from last month.

Investment and hiring intentions are weaker than for more than two years, as are firms' profit and export expectations. The only significant improvement is a sharp 9 per cent drop in the proportion of firms expecting to raise their prices.

National Bank chief economist John McDermott said that indicator had proven a good pointer to near-term inflation and would give the Reserve Bank comfort as it continued to ease.

But while most market economists believe Mr Bollard will cut the official cash rate (OCR) by 25 basis points to 5.25 per cent next Thursday - and a couple predict a 50 basis points move - they are divided about how much easing, if any, is in store beyond that.

Of 15 economic forecasters polled this week, eight expect the bank to have cut the OCR again to 5 per cent by the end of September, three say 4.75 per cent, but four expect it to remain at 5.25 per cent.

Westpac chief economist Brendan O'Donovan said: "The Reserve Bank has to weigh the risk of weakness internationally against strong domestic demand when domestic capacity constraints are pressing. That calls for a softly, softly approach."

Building consents data out yesterday suggest the housing sector has reached a plateau. The number of dwelling consents issued last month was below the monthly average for the previous 12 months, but the value was slightly higher than average.

Seasonally adjusted, the monthly tally fell 10.4 per cent, or 4.3 per cent excluding the volatile apartment sector. Statistics New Zealand said consents have been trending down since last November.

Quotable Value figures show annual house price inflation, which accelerated strongly throughout last year, flattening off at 11.7 per cent in the March quarter, little changed from 11.6 per cent in December.

The wealth effect of higher house prices (household net worth is 6.3 per cent higher than a year ago) is one of the factors sustaining domestic demand, O'Donovan said.

Other supportive factors are the big inflow of immigrants, which boosted the population 1.5 per cent over the past year, and low interest rates.

Retail sales, while slowing, still grew by a robust 1 per cent in real terms in the March quarter.

However, proponents of a more aggressive easing by the Reserve Bank point to the continuing strength of the New Zealand dollar.

The exchange rate is one reason manufacturers are finding the going heavier. The ANZ-Business New Zealand performance of manufacturing index fell into negative territory last month. But the index has been tracking close to the 61.5 level which the Reserve Bank's March forecasts assumed as an average for 2003.