NZ 1st-qtr inflation accelerates at slower-than-expected pace; kiwi dips

Tuesday 20th April 2010

New Zealand inflation accelerated less than expected in the first quarter, suggesting there’s less need for Reserve Bank Governor Alan Bollard to rush to raise interest rates this year.

The Consumers Price Index rose 0.4% in the three months ended March 31, for an annual pace of 2%, according to Statistics New Zealand. Economists had expected a 0.6% gain, based on a Reuters survey though the number has printed closer to Bollard’s estimate of 0.3%. CPI was -0/2% in the fourth quarter of 2009.

The inflation figures may have a bearing on Bollard’s review of monetary policy next week, when he is expected to keep the official cash rate at a record low 2.5% while providing further hints to the timing of any eventual hike. Some economists are now betting he will wait until the third quarter rather than move mid-year as he has been indicating.

Non-tradable inflation was 0.5% in the first quarter, milder than the 0.6% pace the central bank had expected, which may provide some comfort over price increases in the domestic economy. Tradable inflation was just 0.1%.

“The slightly softer non-tradable result gives the RBNZ a bit of inflation breathing space in the near-term,” said Christina Leung, economist at ASB. “There is now a less compelling case for a June OCR hike.”

The New Zealand dollar fell to 70.85 US cents after 71.24 cents immediately before the report. The trade-weighted index, or TWI, fell to 65.65 from 66.02.

Food and fuel prices drove up the CPI in the latest quarter, according to the government statistician. Food rose 1%, led by higher prices of groceries, while transport prices gained 1.1% on more-expensive petrol.

Also among the six industry groups to record an increase, education rose 4.8%, liquor and tobacco rose 1.3%, health gained 0.9% and housing and household utilities rose 0.3%. The biggest individual items were a 6.9% gain in the price of petrol, a 6% increase in fresh milk and a 6.1% gain in university fees.

Among the five declining groups, recreation and culture fell 1.4%. The biggest individual contribution to lower prices came from an 8.3% decline in international air transport prices, the report shows.

Traders are betting Bollard will raise the OCR by about 1.5 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.

A cluster of factors may yet combine to drive up headline inflation this year, including a possible increase in GST to 15%, higher ACC charges and the Emissions Trading Scheme. That could push annual inflation to 4% by year end.

Businesswire.co.nz

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