Inflation data will test bank

Financial markets face a barrage of economic data this week which should provide the Reserve Bank with food for thought as it prepares its review of the official cash rate.

ANZ job advertisements data for June and the Institute of Economic Research's quarterly survey of business opinion appear tomorrow.

Retail trade data for May is due on Wednesday, followed by the food price index for June and the consumers price index for the second quarter, both on Thursday.

Inflation is already knocking at the top end of the Reserve Bank's 1 to 3 per cent range, the number having hit 2.8 per cent in the year to March. Economists expect a similarly high number for the June year.

They also expect the business opinion survey to be closely watched by the Reserve Bank.

Goldman Sachs JBWere economist Bernard Doyle forecast a 0.8 per cent increase in the CPI over the second quarter, slightly below market consensus of 0.9 per cent.

From the survey he expected capacity use, which hit 92.3 per cent in the last survey, to remain very strong.

"We need to see a decline there to give the Reserve Bank any sort of comfort" Doyle said.

Inflation was forecast to bump up against the top end of the range for another year and so the question facing the Reserve Bank was whether it was likely to become a structural problem, Doyle said.

"We just can't see that happening, to be honest. What firms are saying is that the economy is not nearly strong enough to be developing an inflation problem."

Darren Gibbs, senior economist at Deutsche Bank NZ, said the survey would play catchup with National Bank's survey of business of opinion, which revealed a marked decline in confidence between May and June.

Deutsche Bank expects a 0.9 per cent increase in the CPI over the quarter, driven by petrol prices, a rebound in international airfares, construction costs, electricity prices, and the usual second-quarter excise adjustment on alcohol.

Gibbs said the risks for the Reserve Bank were "asymmetric".

"If we get a weaker result, then sure the bank [will not raise rates on July 28] and they certainly won't scale back their hawkish rhetoric either.

"If we get a bad number - a 1.1 or 1.2 per cent and not driven by one-offs, then people will start to worry that the Reserve Bank may need to do more," he said.

The decline in the dollar would give the bank more leeway to move on rates, Gibbs added.

Deutsche Bank expects the official cash rate to stay at 6.75 per cent throughout this year, and for the Reserve Bank to have some scope for easing in the first quarter of 2006.

The London terrorist attacks are not expected to have any significant impact on the local market - the NZX50 took the news in its stride last week closing 23 points higher than the week before.

- additional reporting staff reporters