Tepid NZ inflation keeps pressure off RBNZ so long as construction costs remain contained

Tuesday 16th July 2013

The lowest annual pace of inflation in 14 years is relieving pressure on the Reserve Bank to have to raise interest rates this year, as rising construction costs stay contained.

The consumer price index rose 0.2 percent in the three months ended June 30, just shy of the 0.3 percent expected in a Reuters survey of economists, for an annual pace of 0.7 percent, according to Statistics New Zealand. That's the fourth quarter that the annual pace has been below the Reserve Bank's target 1 percent to 3 percent target band, and is the slowest annual pace since 1999.

Housing and household utilities prices rose 1.1 percent in the quarter for an annual rise of 3.1 percent. Newly built house prices rose 1.7 percent in the quarter for an annual pace of 4.1 percent, and rental prices rose a quarterly 0.4 percent and an annual 2.1 percent.

Darren Gibbs, chief economist at Deutsche Bank NZ in Auckland, said rising building costs aren't spilling over into general price increases, rather they're a sector-specific price movement as resources shift to meet the supply hole in the housing market and ultimately cap house prices.

Because construction pressures aren't pushing up prices in other goods and services, the Reserve Bank can keep rates on hold, he said. Food prices rose at an annual 0.2 percent pace, while apparel prices shrank 1.8 percent, household contents and services price fell 2 percent and recreation and culture group prices fell 1.5 percent.

"Not only is there no smoking gun for a hike in the OCR, there's no gun at all on the basis of the CPI figure," he said.

Gibbs doesn't expect the central bank to lift the OCR until March next year at the earliest, and said it may have scope to delay that further if home lending restrictions take some of the heat out of the property market.

The central bank has been reluctant to lift the key rate to head off the property market as it might stoke investors to buy the kiwi, further strengthening an "overvalued" currency. Instead, it's looking at limiting the amount of mortgage lending banks can make with small deposits.

The kiwi dollar averaged 76.55 in the second quarter on a trade-weighted basis, below the Reserve Bank's projected 77.50. The TWI recently traded at 74.28 after the CPI report was released from 74.36 immediately before. The kiwi dipped to 78.05 US cents from 78.17 cents.

The decline in the currency since the start of May will increase the tradables component of inflation, which includes goods and services facing international competition. Tradable inflation shrank 0.5 percent in the June quarter, and fell 1.6 percent on an annual basis.

Tradable prices are at the lowest level since the September 2010 quarter, just before the government hiked goods and services tax 2.5 percentage points to 15 percent. Non-tradable inflation rose 0.6 percent in the quarter and was up an annual 2.5 percent.

That's fed into cheap imported petrol prices, which have kept a lid on general inflation. Petrol prices fell 2.5 percent in the quarter, the biggest quarterly decline since September 2011, and were down 2.8 percent on an annual basis. Since the end of the quarter petrol prices have increased 5 percent.

"We're on course for a very big lift in tradable prices in Q3" and on an annual basis could be flat in the period, Gibbs said.

Food prices rose 0.2 percent in the quarter, led by a 7 percent increase in vegetable prices. On an annual basis, food prices rose 0.2 percent. Grocery food prices shrank 0.2 percent in the quarter and were down 1.5 percent on an annual basis.

Retailers trimmed their level of discounting in the quarter, with 14 percent of stock sold at a lower price compared to 16 percent in the March period. Clothing and footwear showed the biggest pull back with 15 percent sold at a discount compared to 22 percent in March.

BusinessDesk.co.nz

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