Cash rate could hit 5.75%

Economists were already convinced the Reserve Bank will cut interest rates tomorrow and took today's lower-than-expected rise in consumer prices as making it an absolute certainty.

Most are still predicting a cut in the official cash rate from 6.25% to 6% but there's an outside chance the rate could be cut to 5.75%.

Consumer prices fell 0.2% in the March quarter compared to economists' expectations of a 0.1% increase. That brought the annual inflation rate down from 4% in 2000 to 3.1%.

"The CPI will give the Reserve Bank comfort that the short term surge in inflation we saw last year proved to be just that, short term,'' says Brendan O'Donovan, chief economist at National Bank.

David Drage, an economist at ANZ Bank, says the weak inflation figures could be enough to tip the central bank's hand towards a 50 basis point easing. But it's more likely that, with less than a month to go before its next monetary policy statement, due 16 May, it will be content with just 25 points.

"The main thing that will give the Reserve Bank encouragement, if for no other reason than the inflation expectations perspective, is the large fall in the headline number. It should go some way to reducing the potential upside risk of wage demands,'' Drage says.

Jason Wong, an economist at Credit Suisse First Boston, says the main reason the figures were so much weaker than expected is that people had expected more widespread currency-related price increases. "Some certainly did show through, but not as much as people were expecting,'' Wong says.

The better-than-expected inflation figures come on top of last week's Institute of Economic Research survey showed business confidence slumped from positive 31% in the last quarter of 2000 to a net negative 2% in the first three months of this year.

The results were at odd with the National Bank's survey for the month of March which showed a net 30% of businesses expected the economy to improve over the next 12 months.

O'Donovan says while the NZIER survey may overstate the degree of business concern about the deteriorating international outlook, "the direction and the fragility of confidence is still clear.''

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