NZ central bank's PTA to be tested as firms raise prices

Wednesday 9th July 2008

Inflation in New Zealand this year may accelerate more than the central bank predicts as companies raise prices to claw back profit margins squeezed by soaring costs for fuel, transport and raw materials.

The most businesses since 1987 expect cost increases over the next three months and they�re preparing to pass them on to customers, according to the New Zealand Institute of Economic Research�s Quarterly Survey of Business Opinion, released yesterday.

When the central bank begins cutting rates, as expected this year, �the inflation picture will just get uglier,� Westpac economists Brendan O�Donovan and Michael Gordon said in a report.

Leaders of the Group of Eight nations meeting in Japan yesterday identified soaring costs of oil and food, stoking global inflation, as their biggest concern. O�Donovan predicts New Zealand�s annual inflation will speed to 5.5% by the third quarter, more than the 4.7% pace the central bank has forecast.

�A sharp spike in inflation this year, partly induced by record oil prices, will severely test how well inflation expectations are anchored in the (RBNZ�s) target range,� Westpac said.

Crude oil traded at $140.60 a barrel yesterday, down from the record $145.85 it reached on July 3.

Battered Target

The Consumers Price Index (CPI) for the second quarter is scheduled for release on July 15, giving the central bank an additional snapshot of the economy heading into its July 24 review of interest rates.

The number of firms reporting price increases in the past three months rose to 47% from 42%, according to the QSBO. Annual CPI was above the central bank�s 1% to 3% target range in both the December and March quarters.

�The inflation rate and composition of it will be the ultimate decider on whether the RBNZ can move to ease in July,� said Shamubeel Eaqub, director of Australia and New Zealand investment research at Goldman Sachs JBWere (NZ).

ANZ Bank said companies may struggle to keep raising prices in a shrinking economy. The QSBO results �pose a nasty cocktail of weak growth but high inflation for the RBNZ,� the bank�s economists said in a report.

A reduction to the 8.25% official cash rate this month �remains a 50-50 call,� they said.

By Jonathan Underhill

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