Little headroom for RB as inflation tops target range

By NZPA

Monday 15th July 2002

Figures out today show inflation is hovering at the upper end of the Reserve Bank's target band, leaving it with little choice but to continue along a monetary tightening track.

Statistics New Zealand said the Consumer Price Index (CPI), the department's key inflation gauge, rose by one percent in the June quarter, giving an annual inflation rate of 2.8 percent.

The biggest contributor to the CPI movement was transport, which rose by 3.3 percent during the quarter -- driven by higher petrol prices and international airfares.

Food prices made the only downward contribution, falling by 0.5 percent over the period.

Today's data mirrored private sector forecasts, but leaves the central bank little headroom if it is to stick to its Government-set zero to three percent inflation band.

"Overall it's a reminder that inflation is certainly something the Reserve Bank (RB) needs to keep an eye on," BNZ treasury economist Craig Ebert said.

The bank has hiked official interest rates four times this year to the current 5.75 percent. Across the Tasman, Australia's central bank has lifted rates just twice during that period. Their rate is 100 basis points (bps) lower at 4.75 percent.

Forecasters polled by Reuters rate the risk of a further 25 bps hike at next month's review at 54 percent, while 40 percent expect no change and 6 percent are calling for a 50 bps rise.

"I think initially you'd have to say this number does add, or cement in if you like, the likelihood of an August increase," Robin Clements, chief economist at UBS Warburg said.

The RB has attracted criticism for its hawkish inflation stance, with Finance Minister Michael Cullen promising to revisit the Policy Targets Agreement between the Government and the central bank if re-elected.

He said the bank's policy of aiming for the mid point of the target band, or 1.5 percent inflation, put the brakes on economic growth.

Last week Dr Cullen warned the RB will "crucify" exporters if it continues to lift interest rates to curb inflation. High interest rates could force up the kiwi dollar, as they did in the mid-90s, making New Zealand's exports less competitive, he said.

Market reaction to today's figures was muted, with the New Zealand dollar trading in a narrow US48.40c to US48.70c range for most of the day.

Westpac treasury economist Nick Tuffley said that with inflation running at 2.8 percent per annum, there was little grounds for accusing the RB of being inflexible.

Westpac is expecting another interest rate hike at the RB's August 14 review, although it was still a "line call", Mr Tuffley said.

Annette Beacher, an economist at Salomon Smith Barney, said that while a stronger kiwi dollar would likely keep a lid on future tradeable price inflation, inflation in non-tradeable sectors like services and housing continued to be of concern to the RB.

Housing operation costs rose 1.3 percent during the June quarter, reflecting higher electricity costs and more expensive furniture, and house prices were up 0.6 percent, due largely to higher building material costs, rents and real estate charges.

This was the 13th consecutive quarterly increase in construction costs, SNZ said.

"While a very close call, we still look for a 25 bps increase at the August 14 Monetary Policy Statement," Ms Beacher said.

Mr Tuffley said today's inflation number was likely the peak, with inflation picked to fall gradually over the rest of the year to about 2.5 percent by year-end.

Meanwhile, in other data out today, SNZ said the Food Price Index (FPI) fell by 0.3 percent in the June month, against market expectations of a 0.4 percent rise.

Lower meat, fish, poultry and fruit and vegetable prices were the main contributors to the monthly movement.

For the year ending June food prices rose 3.0 percent, the lowest annual increase since October 2000.

The RB also released its inflation estimates for the June quarter and June year today. The central bank said it calculated a weighted median rise of 0.6 percent for the June quarter and 3 percent for the year to June.

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