Steady interest rates on cards

Quarterly inflation data due on Wednesday is unlikely to encourage the Reserve Bank to ease its tight grip on monetary conditions.

Private sector economists are predicting the Consumer Price Index (CPI) will show a 0.7 per cent rise for the December quarter, the same as the Reserve Bank's prediction. That would leave the annual inflation rate unchanged at 2.5 per cent.

Reserve Bank Governor Alan Bollard, who raised interest rates six times last year to keep the lid on inflation and a steaming economy, said in December "the outlook leaves little room for an easing any time soon, even if near-term inflation outcomes surprise on the downside".

In plain English, that means Bollard is going to concentrate on bad news and ignore possible good news.

The reason is that inflation is forecast for the next two years to be at the top, or near the top, of the 1-3 per cent band the Reserve Bank is mandated to keep it in. In the current jargon that means there's little "headroom" for things to go wrong.

That could happen if the dollar started falling, as it temporarily threatened to do in the first few days of this year.

The strong kiwi dollar has been responsible for containing inflation on imported products and those that compete with imports.

Economists note that most inflation is being generated in the domestic economy, rather than the tradeable sector, which is exposed to international competition.

Although house prices are not part of the CPI, the sector is still expected to provide the biggest contributor to the index through construction costs, rents and rates. Housing makes up 20 per cent of the index, but is expected to contribute 40 per cent of the increase.

Energy prices are also expected to contribute significantly, although in the transport sector airfare discounting is a wild card.

Deutsche Bank economist Darren Gibbs believes the Institute of Economic Research's Quarterly Survey of Business Opinion, due tomorrow, will be at least as significant as the CPI.

The trading activity survey could confirm that the slowdown in the growth rates in the September quarter was evidence the long-expected slowdown actually began last year. If so, Dr Bollard may be able in the second quarter to take his foot off the brake and lower interest rates.

- NZPA