Fall in inflation would come as: news to sections of community

Friday 27th April 2001

By Peter V O'Brien

News last week that inflation fell 0.2% in the March quarter, putting the annual rate at 3.1% disguised the fact that some sections of the community would be worse off than the figures indicated.

Petrol prices fell, costs of international air travel were down and there was a cut in Housing New Zealand rents to an income-related basis.

Prices for food, on the other hand, went up 2.5% in the March quarter. That would have a considerable impact on people at the lower end of the income range who do not live in Housing New Zealand accommodation. Some would get no benefit from lower international air travel prices and others, who may not have cars, would have no gain from changes to petrol prices.

Previous discussions in The National Business Review about the consumers price index and movements in interest rates made the point that all individuals and households have their personal CPI, which may have little relationship to the national statistical average.

The daily press and electronic media have been noting over the past year the two-way street of interest rate reductions.

Instead of talking only about how much people with house mortgages would save when mortgage interest rates went down, they now refer to those, particularly the retired, who rely on interest-bearing securities for much of their income and how they are affected when deposit rates are also reduced.

Changes to interest rates last week after the Reserve Bank cut the official cash rate (OCR) from 6.25% to 6% will eventually affect individuals with interest-bearing deposits if their funds are at, or close to, rollover time.

It is a fair bet a proportion of those people are not flying to other countries, but they still have to eat and now pay higher prices for food.

Many of the retired no longer have mortgages, so there is no cut in living costs when mortgage interest rates go down.

The capital value of their homes could increase with lower mortgage rates but people need a dwelling and, unless they decide to trade down to smaller accommodation the capital gain would go to grateful (presumably) beneficiaries of their estates.

Interest rate yields as at April 20 are in the table and compared with the situation six months ago, when these issues were considered in NBR.

The OCR was 6.5% in October, lowered to 6.25% in January and, as expected, came back to 6% on April 19.

That would normally be seen as a sign projected inflation was under control but the interest rate/inflation/currency mix is more complex.

Figures in the table for public sector securities yields on Friday, April 20 were, on a daily basis, substantially higher than on the previous day.

Anything could have happened since this column went to press but the rise in yields might signal possible disquiet with future developments on the inflation and general economic fronts.

Perhaps paradoxically, the US Federal Reserve's decision to drop its interest rate to 4.5% in an "out-of-the-blue" decision could eventually result in problems here.

That move had an immediate effect on US and world sharemarkets but there seems an underlying suspicion that Fed chairman Alan Greenspan and his colleagues could have a more pessimistic view of the US economy than financial markets.

It has been said often that when the US sneezes the world catches a cold.

It might be appropriate to keep an eye on Mr Greenspan's pharmacy purchases, because he is the most potent individual in assessing, and being followed in, likely US economic trends.

The question of the New Zealand dollar's value is also a factor in local interest rate trends for the rest of the year.

Exchange rates in major economies strengthened a little against the US dollar late last week, although it is more accurate to say the US dollar weakened.

New Zealand's latest inflation rate looks reasonable but it is historical.

The future is what matters. There is a relationship between a comparatively weak currency, consequent imported inflation, higher returns to exporters (subject to being able to sell overseas if major trading partners go into a downturn) and the intricacies of pluses and minuses when interest rates go up or down.

INTEREST RATE YIELDS
Government stock: maturity	Rate (%) 20.4.01	Rate (%) 16.10.00	Change Oct-Apr

March 2002	5.57	6.78	-1.21
April 2004	5.92	6.76	-0.84
Nov 2006	6.18	6.75	-0.57
Nov 2011	6.53	6.76	-0.23
Bank bills
Three months	5.86	6.70	-0.84
Retail rates
Three months	5.1-6.0	6.05-6.5	N/A
Six months	5.1-5.8	6.3-6.8	N/A
12 months	5.25-5.6	6.7-7.0	N/A

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