Inflation likely to emerge as resurgent risk

Tuesday 30th June 2009

Inflation, which has evaporated with the prolonged recession, is likely to loom as a challenge for central banks once confidence returns to global markets, the Reserve Bank of New Zealand said in its annual statement of intent.

“To casual observers, our primary objective of maintaining pricestability may seem the least of our concerns in the current climate,” the bank said in the report, published on its website. “But an enormous challenge looms in theinflationary risks once confidence returns to normal in global markets when there is so much liquidity around.”

The Reserve Bank has forecast inflation will be 1.2% in the year ending March 31, well within the 1% to 3% band the bank targets. Inflation would accelerate to 2.3% the following year.

Governor Alan Bollard this month said the official cash rate is likely to stay low until the second half of 2010. The economy probably rounded out its sixth quarter of contraction today, in the worst economic slump for 30 years.

The bank’s SOI notes that the New Zealand economy had already fallen into recession when the global financial crisis hit, in the midst of a drought and the effects of surging petrol prices and interest rates which choked off consumer spending and demand for housing.

Still, it said the nation “got off remarkably lightly so far compared with larger Northern Hemisphere economies.”While the OCR has been slashed, liquidity facilities bolstered by the central bank and government guarantees offered, New Zealand has been “spared the necessity of zero interest rates, massive capital injections to shore up banks and companies, and unorthodox quantitative easing measures that have occurred particularly in the US and Britain.”

“Financial aftershocks still rock our markets, with New Zealand dollar investments swinging in and out of favour by the day as market appetite for risk fluctuates,” the central bank said. “How long recovery will take is uncertain, though it is likely that it will be some significant time before economic activity returns to robust and healthy levels.”

Businesswire.co.nz

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