Housing prices cause inflation spike in December quarter

By NZPA

Friday 17th January 2003

New Zealand's key inflation gauge edged up another notch in the December quarter, but the case for unleashing an inflation-fighting rate hike is a way off yet, economists' said.

Buoyed by a hot housing market and higher transport costs, Statistics New Zealand's Consumer Price Index (CPI) rose 0.6 percent during the period. That took the annual rate to 2.7 percent, compared with 2.6 percent in September.

House prices have soared in recent months on the back of a strong domestic economy, rising net migration, and interest rates that are considered cheap.

The housing sector, which makes up about 15 percent of the index, recorded a 1.4 percent increase during the quarter driven by increases in the purchase and construction of new dwellings.

Prices in the transport sector also rose by 1.4 percent, due largely to a 10 percent rise for international air travel.

But while inflation is hovering dangerously close to the Reserve Bank's upper limit of 3 percent -- and under normal circumstances the bank would look to hike rates -- economists expect the bank to hold fire as the surging kiwi dollar soothes price pressures.

"We believe the exchange rate is going to win the price battle," Bank of New Zealand economists said in a commentary.

The kiwi pipped US54.70c today -- its highest point since May 1999. The trade-weighted index, which measures the unit against a basket of currencies, was at a similar highs around 60.50.

That will have a downward impact on prices for imports, as well as exerting a dampening effect on activity-based inflation.

Economists expect December to be the turning point for inflation, with BNZ picking the CPI will rise by just 0.2 percent in the first quarter of 2003, giving an annual reading of 2.4 percent. By June, annual inflation is expected to be below 2 percent, where it will likely remain until at least mid-2004, BNZ said.

The consensus view is that Reserve Bank Governor Alan Bollard will stay his hand next week in the first interest rate decision of the year, leaving the Official Cash Rate at 5.75 percent.

The situation is delicately balanced, however, with the market pricing in a 25 basis point cut between now and June, as the rapidly rising kiwi threatens to hurt exports, and subsequently economic growth.

Westpac treasury economist Nick Tuffley said next week's statement is likely to be carefully worded to avoid fueling speculation of interest rate cuts in response to the kiwi's rise.

"Although the Reserve Bank will note the higher New Zealand dollar and the potential disinflationary impact, it will also point out that the appreciation has not happened in isolation, and that the domestic economy remains strong and current inflation pressures high."

The housing numbers shown in today's figures were a lot stronger than expected, he said, indicating that inflationary pressures could continue over the coming year.

Annette Beacher, an economist with Citibank/Salomon Smith Barney agreed.

"We believe the strength of domestic demand and stretched capacity suggests inflation could prove to be more persistent than the Reserve Bank and consensus expect".

In other data out today, the government agency's Food Price Index (FPI) went against the trend, falling 0.7 percent in the December month.

Price decreases were recorded for grocery foods, meat, and poultry. Partly offsetting these falls were higher prices for restaurant meals and ready-to-eat food.

On an annual basis, food prices rose 0.6 percent.

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