Dr Brash holds the line

By BRIAN FALLOW

Reserve Bank Governor Don Brash left the official cash rate unchanged yesterday, surprising no one, and the accompanying statement reinforced market expectations that interest rates will remain on hold until the September quarter.

Dr Brash said the decision reflected a balancing of the weakness overseas against a domestic economy that was more buoyant than the bank had expected.

Market economists generally took the tone of the statement as neutral, in contrast to the easing bias of previous statements.

Dr Brash said the economies of New Zealand's trading partners remained sluggish, there was a "material risk" of further deterioration, and prices for exports had fallen substantially and earlier than the bank had expected.

In what is seen as a bid to broaden the markets' focus beyond the United States and the prospects of an imminent recovery there, Dr Brash said Japan was of particular concern.

Bank of New Zealand chief economist Tony Alexander said that when Dr Brash cut rates in November, he had made it clear he was allowing for more deterioration internationally.

Since then the consensus forecasts for trading partner growth this year had indeed been revised down, but the forecasts for 2003 were back to a normal rate of 3.5 per cent.

"Unless there is a marked deterioration in these consensus forecasts, which is possible, the global growth environment provides no excuse for further easing," Mr Alexander said, especially with Australia's economy picked to grow 3.3 per cent.

On the home front, Dr Brash said consumer spending was more buoyant than expected and business investment was also holding up.

"The housing market has strengthened in recent months and the labour market continues to be relatively tight."

He expressed concern that a blip in the inflation rate back above 2 per cent in the year to March could mean higher wages and prices.

But ANZ chief economist David Drage said the labour market was easing. The number of job advertisements might have risen last month, but over the December quarter as a whole they had fallen 10 per cent from the September quarter, seasonally adjusted.

WestpacTrust chief economist Adrian Orr said that with the economy expected to grow just 2 per cent in the year to March 2003, domestic inflation would probably remain subdued.

He is sticking with his forecast of a further 25 basis point cut in rates when the Reserve Bank reviews them again in March, but the mainstream view is that rates will rise, though not until July or August.

Mr Alexander said: "We expect rates to be half or three-quarters of a per cent higher by the end of the year.

"We don't expect a repeat of the rapid tightening which began in November 1999, when rates went up 2 percentage points in six months."