Retailers' sales lift reflects the heat

By BRIAN FALLOW, economics editor

Stronger than expected retail sales in August have added to evidence that the domestic economy is running hot.

Money markets are now betting that Reserve Bank Governor Alan Bollard will lift interest rates from as early as next year's March quarter.

But Deutsche Bank chief economist Ulf Schoefisch believes they are getting ahead of themselves.

Despite buoyant domestic demand, underlying inflation pressure remains low because of the effect of a strong dollar on the retail prices of imported goods.

Competitive pressure is encouraging retailers to give customers the benefit of exchange rate gains on imported wares rather than pocketing them as fatter profit margins, Schoefisch says.

And while inflation in non-tradeables, driven by the housing market, is running around 4 per cent, low inflation in the rest of the economy is likely to keep overall consumers price index inflation to about 1.5 per cent over the next year.

That is well within the Reserve Bank's comfort zone.

"There's a big buffer there for Dr Bollard," Schoefisch said.

"He can tolerate quite a bit of pressure in the housing market and construction cost inflation without having to react to it."

Schoefisch does not think Bollard will raise interest rates to cool the housing market while exporters are suffering.

"He would have to prove quite strongly that the housing market is threatening generalised inflation, and that threat is not there at the moment."

Raising interest rates would risk pushing the exchange rate higher. "Comparing the speed of appreciation against the US dollar over this year, New Zealand and Australia are right up there and - surprise, surprise - we have the highest interest rates in the world."

Statistics New Zealand said retail sales rose 0.6 per cent in August, adjusted for seasonal effects.

"Core" retail sales, which exclude the volatile automotive market, rose 1 per cent. But some of the increase may have been brought forward from September.

Statistics NZ said it had improved the speed with which it identified new businesses.

That may have boosted the August survey's sample of retail firms at the expense of September.

Of the 15 store-types into which retail is divided, 10 had increased sales.

They were led by cafes and restaurants, and personal and household services.

But vehicle sales fell 3.1 per cent, reversing July's 2.9 per cent rise.

UBS Warburg chief economist Robin Clements said retail sales had regained momentum after a lull in March and April.

Consumer confidence was underpinned by rising employment and wages, combined with higher house prices but relatively low mortgage rates.