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Emissions Trading Scheme set to stoke inflation, Bollard says

Thursday 11th March 2010

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New Zealand’s amended Emissions Trading Scheme will stoke inflation starting next year, driving up prices of petrol and electricity, Reserve Bank Governor Alan Bollard says.

In the central bank’s first assessment of the ETS impact, it predicts the first-round impact of the policy will add 0.4% to headline inflation in the year ending June 2011, as higher production costs are passed through to retail prices. 

The changes are also expected to have an indirect impact, via prices of goods and services in energy-intensive industries such as transport.

ETS energy charges will be increased further in 2013, though the central bank didn’t attempt to gauge the impact, saying it is beyond its published forecast horizon. 

In Bollard’s review of monetary conditions, released today, he said monetary policy won’t attempt to offset the first-round effects of the ETS. 

Still, some second-round impacts of the ETS could occur, “if these relatively higher prices cause consumers and businesses to reassess their beliefs on underlying aggregate inflationary pressure, and therefore change their wage and price setting behaviours,” Bollard said. 

The central bank today lifted its track for quarterly inflation, compared to its December MPS, forecasting consumer prices will rise 0.9% in the second quarter from the 0.4% pace it predicted in December.

Bollard cited the amended ETS and rising ACC charges for the short-term pickup.

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