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Inflation up 1.1% in third quarter, RBNZ to keep rates low

Monday 18th October 2010

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New Zealand consumer prices rose 1.1% in the three months to September 30, with rising vegetables costs underpinning the increase in food prices.

But the annual inflation figure of 1.5% remains low, keeping pressure off the central bank to start hiking interest rates.  

The 1.1% third quarter increased compared with a 0.3% rise in the second quarter, according to Statistics New Zealand. Economists expected a 1% increase, according to the median in a Reuters survey, with forecasts ranging from 0.8% to 1.2%. Annual inflation was 1.5%, slowing from a revised 1.7% in the 12 months through June.

That's the slowest annual inflation since March 2004. 

"There was a small number of one-offs lifting prices - rates increases and seasonal food prices, and we'll see another spike next quarter with GST. But underlying inflationary pressure is pretty much under control with spare capacity around in the labour market," said John Ballingall, deputy chief executive at New Zealand Institute of Economic Research.

"Mortgage rates won't be going up any time soon." 

Central bank Governor Alan Bollard held the official cash rate at 3% in last month's monetary policy review, after a slew of soft manufacturing and business confidence data showed the country's economic recovery was stalling.

Markets expect Bollard to hike the OCR 54 basis points over the coming year, according to Overnight Index Swap curve.  The pace of inflation is tipped to spike above the central bank's 1% to 3% target band after the government lifted consumption tax to 15% from October to offset personal and company income tax cuts.

The RBNZ forecasts annual CPI to go as high 4.8% in the June quarter.  

NZIER's Ballingall said that provided the one-off increase in GST doesn't feed into underlying inflationary pressures, such as wage negotiations, this shouldn't put too much pressure on the central bank to act.

He said Bollard will probably resume tightening monetary policy in March next year.  

A 2.4% jump in food prices over the period led the acceleration in prices, as the price of vegetables climbed almost 20%, and milk, cheese and eggs rose 5.2%. Local body rates bills increase 4.4%, while private transport bills other than petrol increased 8.4%. Electricity prices advanced 2.8% in the quarter.

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