2002 prices expected to have risen 2.7 percent

By NZPA

Monday 13th January 2003

Prices are expected to have risen a fairly strong 2.7 percent on average last year, but that is unlikely to spark a hike in interest rates from new Reserve Bank governor Alan Bollard, economists say.

Inflation data for the fourth quarter of 2000 is published on Friday with few arguments on what it is likely to be.

Economists' forecasts are in a tight range of 0.5 percent to 0.7 percent for the December quarter.

The consensus figure is 0.6 percent, which would bring the 2002 year rate of inflation to 2.7 percent.

Economists point to the housing sector as one of the main inflation culprits in the December quarter.

House prices, house-related products and construction costs and rents have been rising markedly.

A seasonal increase of 5.5 percent in international airfares had also contributed to inflation.

Off-setting that partially would be a 10 percent fall in domestic airfares.

But inflation was forecast to fall this year and a key factor in that was a strengthening New Zealand dollar.

That would hold Central Bank governor Alan Bollard back from increasing interest rates for some months, some economists said.

Deutsche Bank senior economist Darren Gibbs said there should be price falls in some imported products because of the increased buying power of a stronger New Zealand dollar.

The dollar had appreciated about 15 percent against the Japanese yen. Deutsche Bank had factored in a 2.5 percent fall in home appliance prices in the fourth quarter.

"You would expect to see some price declines even though the market is very buoyant.... There is not a lot of pressure there obviously for retailers to cut prices so that works the other way."

He expected to see more price falls during the year as the New Zealand dollar continued to appreciate.

Deutsche Bank was expecting the dollar to rise another couple of cents against the United States and Australian dollars and against the yen, given the poor state of the Japanese economy.

The 2.7 percent yearly inflation rate was at the upper limits of what the Reserve Bank might be comfortable with when its target band was between 1 percent and 3 percent, Mr Gibbs said.

Dr Bollard probably wanted inflation to stay between 1.5 percent and 2.5 percent.

"Provided it looks like it's going to do that over a two-year period, he's probably reasonably content to leave policy unchanged," Mr Gibbs said.

"We do see that inflation will go lower. It will go towards the bottom end of that 1.5 percent to 2.5 percent range over the next 12 to 18 months. That's the currency effect coming through," Mr Gibbs said.

Deutsche Bank was expecting an interest rate cut in September to stimulate the economy after the dampening effects of the higher dollar on export prices and the economy.

Westpac chief economist Adrian Orr said Westpac was forecasting 0.7 percent for the December quarter and 2.8 percent for the year which would "keep that edge of pressure on the RBNZ" though balancing that was a weak global economy.

"So you have a very strong domestic sector keeping that upward pressure on inflation," Mr Orr said, unlike the European and US economies.

He expected interest rates to be on hold until the second half of this year. Westpac was optimistic the US would "come to join our party" in the second half of the year as corporate profits and sharemarket and consumer confidence there recovered.

Mr Orr said the Reserve Bank's forecasts had been for inflation pressures to ease during 2002 but that had continually been delayed because the domestic economy kept surprising with its strength.

UBS Warburg senior economist Robin Clements said he was forecasting 0.5 percent for the December quarter.

He also estimated a "core inflation" of 0.4 percent when volatile seasonal price rises and increases in government charges were removed.

The core rate was the rate the central bank could influence.

"If we get 0.5 percent and the core rate a little bit lower that's going to add confirmation to the Reserve Bank's view that inflation's likely to fall materially over the year ahead," Mr Clements said.

Inflation was running a bit more than 2.5 percent at present but he expected it to end 2003 a bit under 2 percent.

"That's pretty much what the Reserve Bank is thinking. A lot of that is going to come from exchange rate effects and a slowing economy," Mr Clements said.

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