CPI drop likely to be good for interest rates

Wednesday 20th January 2010

New Zealand consumer prices fell in the fourth quarter, matching the central bank’s forecast and sending the kiwi dollar lower on the prospects of a longer wait before the bank raises interest rates.

The Consumer Price Index fell 0.2% from the third quarter, when prices jumped a higher-than-expected 1.3%, according to Statistics New Zealand. Annual inflation was 2%, in the middle of the Reserve Bank’s 1%-to3% target range. Economists had expected no change from the third quarter for an annual rate of 2.1%.

The fourth-quarter CPI is a key indicator for Reserve Bank Governor Alan Bollard, who last month flagged concern that the recession hadn’t dented inflation as much as expected. Bollard has tipped a mid-year increase in the official cash rate from its current record low 2.5% but the market is anticipating he will start as soon as March and have hiked the OCR by 75 basis points by June 30.

"Price pressures have come off markedly," said Danica Hampton, currency strategist at Bank of New Zealand. “The Reserve Bank's in no hurry to raise interest rates" and the lack of inflation pressure gives it scope to hold off until the middle of the year.

The New Zealand dollar dropped to 73.52 U.S. cents after the report, from 73.95 cents immediately before the data was released.

Economists will push back their estimates for the next increase in the official cash rate, currently at a record low 2.5%, after today’s data. Before today, seven of 18 economists surveyed by Reuters had been expecting a 25 basis point increase in the OCR in March, with the survey indicating most expected the RBNZ to start hiking in April with the rate climbing to 3.75% by the end of September.

Food was the biggest contributor to the decline in CPI in the final three months of 2009, with prices falling 2.4%, after gaining 1.7% in the third quarter. Prices of vegetables tumbled 17.6% having climbed more than usual over the winter peak after cold weather in May.

The transport group recorded a 1.5% increase in the fourth quarter, led by a 13.9% surge in prices for international air transport. Among other groups, clothing and footwear rose 1.8%, while alcoholic beverages and tobacco fell 1%.

Bollard hardened his language in the December Monetary Policy Statement, bringing forward the likely timing of tighter monetary conditions amid signs of continued recovery in the domestic economy. He had previously indicated rates could rise in the second half of this year.

The central bank forecast annual inflation would dwindle to 0.9% in the third quarter, below its target band.

Bollard singled out the impact on consumer spending of higher house prices as “a key uncertainty,” noting that credit growth so far has remained subdued.

Businesswire.co.nz

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