Hike in prices to squeeze up interest rates

By Brian Fallow

WELLINGTON - More and more businesses are planning to raise prices according to the latest National Bank business outlook survey, adding to the pressure on the Reserve Bank to start raising interest rates.

The decline in overall business confidence since March stopped last month, with a net 17 per cent of respondent firms expecting the general business climate to improve over the next 12 months, unchanged from August.

Firms' expectations about their own activity held steady too, at high levels. Export forecasts remain strong, near five year highs. Hiring and investment intentions and expected profitability were also roughly unchanged and in positive territory.

The disappointing indicator in the latest survey was pricing intentions, National Bank chief economist Brendan O'Donovan said.

A net 21 per cent of firms expect to raise prices in the next three months, up from 14 per cent a month ago and the highest level for four and a-half years.

The penalty will be higher interest rates, Mr O'Donovan said.

"After tying their own slip knot last month respondents have now tightened the noose."

The Reserve Bank's hand was being forced, Mr O'Donovan said.

"Short-term indicators of growth in New Zealand are strong. International growth and inflation are rising. Monetary conditions are over easy and there is emerging evidence that 'one-off' price shocks like petrol, rates and electricity are flowing through to inflation expectations."

Inflation expectations in the National Bank survey have been rising since June and are back above 2 per cent.

Mr O'Donovan expects the Reserve Bank to raise the official cash rate 50 points to 5 per cent at the next monetary policy statement on November 17.

The money markets have already priced in such a move, with 90-day bill yields around 5.24 per cent, and with most of the major banks have already raised their floating mortgage rates, the National Bank being the exception.