NZ inflation likely to be reigned in but near top of RBNZ range

By NZPA

Friday 11th October 2002

New Zealand's inflation is likely to have moderated in the three months to September, although it will continue to pressure the Reserve Bank.

Statistics New Zealand releases its third quarter Consumers Price Index -- the official gauge of inflation -- on Tuesday.

The CPI rose by 1 percent in the June quarter, giving an annual inflation rate of 2.8 percent, close to the top of the Reserve Bank's inflation target of 1-3 percent.

Deutsche Bank senior economist Darren Gibbs picked an increase in the CPI of 0.6 percent for the September quarter from the June quarter, and annual inflation to fall slightly to 2.7 percent, from 2.8 percent.

Mr Gibbs said likely boosts to inflation would include an increase in alcohol prices; an 8 percent rise in motor vehicle registration costs; a 3 percent rise in local authority rates; a rise in rentals and construction costs due to the buoyant housing market; and a 2 percent rise in electricity prices.

The key downward contributions were expected to come from a 2 percent fall in petrol prices, and a 2 percent fall in the price of international air travel.

Food prices, which account for 18 percent of the CPI, have been fairly flat.

House prices were rising, particularly in Auckland and Wellington, but Mr Gibbs told NZPA the Reserve Bank would not be too worried about implications for inflation from hot house prices.

"To have a few positive factors at the moment isn't such a bad thing, I would have thought.

"The (Reserve) Bank is well aware of what's happening in the housing market, they don't seem as worried as they may have been about housing trends in the past."

Housing makes up a smaller direct contribution to the CPI than it did in the late 1990s when a speculative bubble in Auckland boosted national inflation.

ANZ bank economists said in a note that widespread price rises among items in the CPI were unlikely to provoke the Reserve Bank to dampen inflation as it would have in the past.

The arrival of the new Reserve Bank Governor, Alan Bollard, in August meant the bank had to rewrite its inflation agreement -- the Policy Targets Agreement -- with the Government. The target narrowed 1-3 percent from 0-3 percent, and inflation could now be looked at "over the medium term".

"Under the Reserve Bank's old inflation target, and in a world where there was less uncertainty about the international economy's prospects, an inflation rate this close to the top of the target range ... would probably have been cause for immediate concern," ANZ economists said.

"However, the combination of a more flexible inflation target ... and ongoing concerns about global weakness and risks is providing an offset for now."

Improvement in the global economy and a continuation of current domestic economic strength would probably provoke the Reserve Bank to "dab the brakes" -- raise interest rates -- during the first half of 2003, the ANZ said.

Bank of New Zealand Treasury Economist Craig Ebert told Reuters he expected inflation to begin falling as the New Zealand economy slowed from its hot 1.7 percent quarterly growth rate in the three months to June 2002.

"We've got inflation coming off, peaking at the end of this year, beginning of next, and it sort of washes down closer to the mid-point (of the Reserve Bank target)," Mr Ebert said.

Economists polled by Reuters expected inflation to recede to 2.2 percent in 2003.

The Reserve Bank has raised interest rates by 25 basis points four times this year, to 5.75 percent, to protect the upper limit of its inflation target.

Comments from our readers

No comments yet