KEY POINTS:
Yesterday's weaker than expected retail sales numbers will have done nothing to make Reserve Bank governor Alan Bollard's dilemma - about when to start easing rates - any easier.
The 1.2 per cent drop in real retail sales is the kind of slowdown in consumer spending he has been trying to engineer for a long time.
But it also sent the dollar lower, aggravating short-term inflation pressures and the risk of a wage-price spiral.
It is a sign that we are near a turning point in the interest rate cycle that there is a particularly wide spread of views, not about the direction (now clearly down), but about the timing of the bank's next move.
At the aggressive end of the spectrum is ANZ National Bank's head of markets John Body.
The sharpest quarterly fall in retail sales volumes for 11 years comes on top of a string of sombre comments from leading retailers, a sickly property market, indications from Finance Minister Michael Cullen that the Budget will be relatively tight and last week's back-pedaling on the emissions trading scheme, he says.
He concludes that Bollard could start to ease at the next opportunity, June 5.
"The issue is whether the economy is decelerating more quickly than the bank expected," he says. "I think it is. So then are monetary conditions appropriate? No."
The swaps market now rates the chances of a June interest rate cut as one in three, but Body said the pressure on the bank from that quarter could rise as the date gets closer.
The steady fall in the transtasman cross rate in recent weeks, as international investor money moves out of Kiwi dollars and into Aussie ones, is evidence of a shift in sentiment.
"Another indicator is the number of calls we get from global hedge funds, which has gone from one a week to four or five a day. People looking at New Zealand from afar are making the assessment that given what is happening in the real economy something has got to give in monetary policy."
Goldman Sachs JBWere economist Shamubeel Eaqub takes a similar view.
The message of the March quarter retail numbers was that the pace of deterioration in the economy had been sharp, he said.
Rising food and fuel prices had taken a toll on other, more discretionary items.
It was almost certain the economy contracted in the March quarter, he said, and Bollard needed to start easing next month.
But Deutsche Bank chief economist Darren Gibbs believes the central bank will take a lot more convincing that inflation is under control than a quarter's worth of weak data.
Bollard would be wary of a repeat of 2006 when the markets got over-excited driving the dollar and retail interest rates lower only to see the economy perk up before inflation pressures had had a chance to vent, Gibbs said.
In the month of March while overall retail sales, seasonally adjusted, were down 1.2 per cent, core sales (excluding the automotive sector) were down a more modest 0.5 per cent and much of that was likely to reflect the fact that Easter fell in March this year - something Statistics New Zealand did not adjust for.
Gibbs expects the June monetary policy statement to indicate a bias towards easing - conditional upon evidence the economy has entered a prolonged slump and that this is leading to material easing of pressures in the labour market.
Even with the loss of 29,000 jobs in the March quarter the unemployment rate is only 3.6 per cent.
"We think that such evidence is unlikely to be available before the bank's September monetary policy statement and quite possibly not much before the end of the year," he said.
In the most recent Reuters poll most market economists expected the bank to have started easing before the end of September.
Quiet tills
* March quarter retail sales were flat in dollar terms and down 1.2 per cent in real terms. March was weaker than February, which was weaker than January.
* Car yards saw the biggest drop. Overall, 17 of the 24 store types saw sales volumes contract.
Retail data jolts dollar lower
Yesterday's soft retail sales data jolted the New Zealand dollar half a cent lower and helped clear the path for a move towards US70c in coming weeks, currency strategists said.
ANZ head of markets John Body said the kiwi fell half a cent against the greenback to US75.60c. It closed at US75.65c.
Body believed if the Reserve Bank cut interest rates next month the kiwi would be driven down towards US70c. Deutsche Bank currency strategist John Horner said the outlook for the kiwi was more bearish, saying "we do think it's going to come under a good deal of pressure in coming weeks".
The New Zealand dollar moved lower against all the major currencies yesterday, falling to a fresh eight-month low on the trade weighted index.
- Adam Bennett
