Inflation unlikely to go any lower as delationary effects roll out, English says

Thursday 16th June 2016

New Zealand's 0.4 percent annual rate of inflation probably won't go any lower as a slump in oil prices and a cut to the Accident Compensation Corp levies are unlikely to be repeated, Finance Minister Bill English says.

The country's consumers price index has been sitting below the Reserve Bank's target range of between 1 percent and 3 percent since September 2014, and cheap oil and a persistently strong currency have continued to stifle local inflation. English today talked down the likelihood of inflation slipping into negative territory, saying oil prices had come back from their lows earlier this year and the ACC levy cut was a one-off.

"It's hard to believe we'd get too many further deflationary effects coming along," he told parliament's finance and expenditure committee. "We've got inflation down to 0.4 percent, but it's hard to see it going lower than that."

That benign inflationary environment is a global phenomenon and something the Reserve Bank has been contending with as it aims to achieve price stability over a medium term with low interest rates, while at the same time avoiding financial instability if it spurs too much demand for housing with cheap funding costs.

That low interest rate environment has been cited as contributing to the housing boom, alongside a shortage of property, and English today said the decisions made by households to take on debt was one they would have to bear the consequences of if the market corrects.

"The question is not so much whether the level's at the right level, it's whether those people are able to deal with the risks that will arise if interest rates increase, migration slows down, and the housing market drops back," English said. "Some of them will be and some of them won't be, but they need to think pretty carefully about those set of risks because as the months go by they are more likely to occur."

Reserve Bank data show households held mortgage debt of $132.8 billion as at Dec. 31, about 20.2 percent of the overall value of property and land at $657.2 billion. The last peak in the property market showed property valued at $477.2 billion in March 2008 with mortgages of $99.5 billion, or 20.9 percent of overall property value.

Traditionally inflation has helped mitigate households taking on debt by reducing the value of that debt in real terms, and policy makers have imposed measures to curb some of that demand, such as the Reserve Bank's loan-to-value ratio restrictions and the government's 'brightline' test to tax capital gains on property sales.

English said the next few months will be important with the upcoming national policy statement on urban planning, Auckland city's unitary plan, and Resource Management Act amendments to tackle supply side issues.

Immediately after English's hearing, Treasury Secretary Gabriel Makhlouf backed the minister's view on inflation, saying the department's forecasts are for inflation to reach 2 percent in 18 months.

"New Zealand will still see a return of inflation, it's just much slower than expected," he said.

While low interest rates may not have spurred price increases like they normally would, Makhlouf said they had been helping businesses make investment decisions.

BusinessDesk.co.nz

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