NZ inflation probably accelerated in first quarter on fuel, food

Monday 19th April 2010

New Zealand inflation accelerated in the first quarter, figures this week are expected to show, with a sharper increase in prices than the Reserve Bank projected last month.

The consumer price index rose 0.6% in the first three months of the year, according to a Reuters survey. Annual inflation tipped above the mid-point of the central bank’s 1% to 3% range, at 2.2% The RBNZ estimates in March were for a quarterly 0.3% and an annual 2%.

The data provides a late clue for investors pondering how current conditions will influence Governor Alan Bollard when he next reviews policy on April 29. The CPI had a reading of -0.2% in the fourth quarter, consumer spending and business investment are tepid and more economists are leaning toward a second-half hike in the official cash rate than a mid-year one.

“While we expect a climbing trajectory for inflation over 2010, the patchiness of the recovery is likely to contribute to a more patient policy response,” ANZ economists Cameron Bagrie and Mark Smith wrote in a report. They expect Bollard to lift the OCR in the third quarter.

Traders are betting Bollard will raise the OCR by about 1.6 percentage points in the next 12 months, based on the Overnight Index Swap curve. That suggests the RBNZ will lift rates at every opportunity this year once he begins.

Even if first-quarter CPI shows inflation remains tame, a cluster of factors may combine to drive up the headline number this year, including a possible increase in GST to 15%, higher ACC charges and the Emissions Trading Scheme.

That would propel headline inflation to more than 4% by year-end, according to Robin Clements, economist at UBS New Zealand.

The March MPS was released before fourth-quarter GDP figures last month, which showed the fastest growth in two years at 0.8%.

The RBNZ’s prediction was 0.6%. Still, with little steam in the housing market amid fear of a tightening tax noose and high unemployment at 7.3%, Bollard may not make good on his prediction of a mid-year hike.

“Traders are agonizing over whether or not the Reserve Bank will hike the OCR in June,” said Brendan O’Donovan, chief economist at Westpac Banking Corp. “If the RBNZ wants to signal a June move ahead of time, it will have to do so at the April 29 OCR review. This is the last major piece of data before that make-or-break day.”

Westpac expects Bollard will go in June, based partly on its forecast for inflation, which the lender is picking to speed to 0.7% in the first quarter on higher prices for food, fuel and construction.

The ANZ-Roy Morgan consumer confidence survey a month ago showed New Zealanders were less bullish about the outlook for the economy. This month’s survey is due out on April 22.

The April survey “will be interesting to watch to see if this theme has continued,” said Philip Borkin, economist at Goldman Sachs JBWere. “Borkin said non-tradable inflation may have been 0.6% in the first quarter, for a year-on-year 2.2%.

Businesswire.co.nz

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