Inflation eases back within RBNZ range, threatens to undershoot

Monday 13th July 2009

New Zealand’s inflation rate likely fell back to near the middle of the central bank’s target range in the second quarter and threatens to undershoot in the current quarter, helping keep intact the RBNZ’s view that interest rates can stay low through much of 2010.

The consumer price index rose 0.6% in the second quarter for an annual rate of 1.8%, according to the consensus of economists’ forecasts. That’s well within the central bank’s 1%-3% target range.

The annual rate will ease to just 0.7% in the third quarter, the bank forecast in its June Monetary Policy Statement. The second-quarter data is due to be released on Thursday, July 16.

“Disinflation remains the theme of 2009 as the economic contraction creates economic slack both at home and around the world,” said Brendan O’Donovan, chief economist at Westpac Banking Corp.

He expects “a generally weak inflation period over the coming two years that ultimately allows the OCR to remain low for some time.”

The central bank expects the worst recession in 30 years will extend through until the final quarter of 2009 with its effects lingering into next year, when unemployment is set to peak at 7.1%, according to the RBNZ’s estimate.

Exacerbating the drop off in the annual inflation rate, which peaked at 5.1% in the third quarter last year, is the roll off of the high-inflation second and third quarters of 2008 when oil prices were soaring and the housing market was still overheated.

Reserve Bank Governor Alan Bollard anticipated abating inflation pressures in July last year, when he embarked on what became the steepest easing cycle since the official cash rate was devised, looking through the third-quarter peak in inflation amid signs of a deteriorating global economy.

He kept the OCR at a record low 2.5% last month and has urged lenders to pass on more of the reductions in their floating rate loans. There’s a risk of even weaker than expected inflation data for the second quarter, resulting from more discounting by retailers, cuts to airfares and the impact of increased child-care subsidies, according to Philip Borkin, economist at ANZ Bank.

Upside risks include increases in energy and health-care costs, he said. Central banks in Europe and the US have printed money to flood the financial system with cash, to thaw credit markets frozen by the fall-out of the collapse in mortgage-related securities.

The Bank of England last week kept its bond purchase programme unchanged at 125 billion, a decision some read as a signal the financial crisis is abating.

“Central banks are alluding to the challenges that excess liquidity will present to the longer-term inflation picture,” Borkin said. “We consider this a risk as opposed to reality, and are equally mindful of deflationary forces in the short term.”

Transport is likely to show the strongest price gains for the second quarter, economists say, driven by resurgent fuel prices. Food prices may be little changed, according to UBS New Zealand. Housing and utilities may also barely budge, it said.

Crude oil sank on Friday, extending its slide on concern world growth won’t revive fast enough to stoke demand for fuel. US crude slipped 52 cents to US$59.89 a barrel, bringing its slide last week to 10%.

Businesswire.co.nz

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