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NZ inflation still seen below RBNZ's mid-point target in third quarter

Friday 13th October 2017

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Annual inflation may get a slight lift from stronger food and housing-related prices in the third quarter but economists say it will remain below the mid-point of the central bank's target band and the tepid picture will keep interest rates firmly on hold.

Economists expect inflation was 0.4 percent in the three months ended Sept. 30, for an annual rate of 1.8 percent, according to the median in a poll of 13 economists surveyed by Bloomberg. That compares to the central bank's projection of inflation of 0.2 percent in the third quarter for an annual rise of 1.6 percent. The data is due on Tuesday. 

"Inflation has picked up from its lows in the last couple of years, but remains short of the 2 percent midpoint of the Reserve Bank’s target band," said Westpac Banking Corp senior economist Michael Gordon. The central bank is mandated with keeping inflation between 1-and-3 percent with a focus on the mid-point. Westpac expects quarterly CPI of 0.5 percent in the September quarter.  

According to Gordon, food prices will make the most significant contribution to the rise in the CPI for the September quarter. "Vegetable prices have largely receded from their April-May spike when wet weather wiped out some crops. However, grocery prices have been picking up in recent months – particularly for dairy products such as butter, reflecting the rise in global prices this year," he said. Food prices account for about 19 percent of the CPI. 

ASB Bank chief economist Nick Tuffley also said that housing and food continue to be the key drivers of inflation. "We expect annual construction cost inflation to stay elevated at around 6 percent, more than three times the rate of headline inflation," he said. Combined with a 3 percent increase in rates over the quarter and higher rents, the housing component accounts for more than half the inflationary pressure in the period, said Tuffley. ASB expects a quarter-on-quarter lift of 0.4 percent for an annual inflation rate of 1.8 percent. 

ANZ Bank New Zealand senior economist Phil Borkin agreed but said "there are likely to be a few more signs of life in the broader domestic inflation picture too." ANZ is tipping a 0.7 percent quarter-on-quarter lift in non-tradable inflation, the largest quarterly increase for a September quarter in four years. Non-tradable inflation involves goods and services that don't face overseas competition, such New Zealand electricity or medical services.

Borkin also expects the CPI to be 0.4 percent higher in the September quarter. However, even an upside surprise wouldn't dramatically alter the monetary policy picture, he said.

Acting Reserve Bank governor Grant Spencer kept the official cash rate unchanged at 1.75 percent as widely expected at the September review and signalled no change on the immediate horizon. Rates have been on hold since November last year and the central bank’s forecasts show it does not expect to lift rates until September 2019 at the earliest.

"The RBNZ remains cautious and watchful. Its stance has barely changed since the start of the year despite the odd data surprise (in both directions). The hurdle for action remains high, and policy looks set to be on hold for an extended period," said Borkin. 


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