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Annual inflation tipped to hit mid-point of RBNZ's target range in 1Q

Tuesday 18th April 2017

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Higher food and fuel prices are expected to propel annual inflation to 2 percent in the first quarter, marking the first time it will hit the mid-point of the central bank's target range in five-and-a-half years. 

Economists expect inflation was 0.8 percent in the first three months of the year,  for an annual rate of 2 percent, according to the median in a BusinessDesk poll. That would exceed the central bank's projection of inflation of 0.3 percent in the first quarter for an annual rise of 1.5 percent. The data is due Thursday. 

"The RBNZ could be marking off a key milestone on Thursday" with a return to the mid-point, said Kim Mundy, an economist at ASB Bank, in a note. "Hitting around that figure marks a return to a more ‘normal’ pace. Just 6 months earlier inflation was a mere 0.4 percent."

The central bank is mandated with keeping annual inflation between 1 and 3 percent, with a focus on the mid-point. 

Three months earlier, the consumers price index reached 0.4 percent, a fourth-quarter pace that helped lift annual inflation to 1.3 percent, the first time the annual rate had been above 1 percent since the September 2014 quarter.

While inflation is expected to be significantly higher than the RBNZ's forecasts, economists say it may be temporary and therefore not have much impact on monetary policy. The central bank kept interest rates at a record low 1.75 percent in March and reiterated that they are expected to stay at that level "for a considerable period." 

With inflation back at target (or close to it), some may argue that the RBNZ should be shifting from its neutral stance, said ANZ Bank New Zealand senior economist Phil Borkin. "However, we doubt the data will alter the RBNZ’s thinking greatly. The RBNZ was reasonably explicit in March that it is discounting the impact of 'one-offs,'" he said.

In March the central bank underscored headline CPI will be variable over the next 12 months due to one-off effects from recent food and import price movements. Borkin warned Thursday's data won't shed much light on the outlook for inflation from here "and so it is going to leave the RBNZ in a cautious, watchful stance." 

Some of the factors contributing to the rise in the first quarter are "one-hit wonders rather than inflation pressures that will be sustained," said ASB Bank in a note. Fuel prices rose an estimated 6 percent over the quarter and food prices rose more than normal and "a further 10 percent tobacco tax excise increase rounded out the bumps," it said. 

Kiwibank chief economist Zoe Wallis also points to "some temporary factors at play" but notes there are pockets of inflation pressure in the economy, such as inflation related to the housing and construction sectors due to the current construction boom. "However, we expect annual inflation will ease to between 1.5-2 percent over the remainder of 2017, as temporary drivers wane and we have an economy growing at or slightly above trend," she said. 

Bank of New Zealand, however, expects inflation to continue to hover around the 2 percent mark "this year and beyond." BNZ senior economist Craig Ebert agreed the lift in the first quarter CPI is partly predicated on food and fuel prices but "this is not to lose sight of the firm to firming undercurrent of pricing trends, and strongly so in respect of domestic (non-tradables) inflation."

This "should, in time, have the RBNZ questioning the wisdom of its record low official cash rate," said Ebert. In the meantime, however, BNZ suspects the bank will keep sounding unconvinced that CPI inflation will keep around 2 percent which is "why we expect any OCR increase to be delayed until well into next year, even though there’s a strong economic case for it occurring (much) earlier than this."






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