Inflation peaked in third quarter as economy slowed

Friday 17th October 2008

New Zealand inflation probably peaked in the third quarter as the central bank predicted, boosting the prospects for the steepest easing in monetary policy since the official cash rate was introduced in 1999.

Consumer prices rose 1.5% in the third quarter for an annual pace of 5.1%, an 18-year high, according to the consensus of estimates collected by Reuters. Prices of food, petrol, electricity and government charges drove the acceleration in annual inflation.

The Reserve Bank last month cut the OCR by a greater-than-expected 50 basis points while forecasting annual inflation would reach 4.9% in the latest three months. Governor Alan Bollard on Sept. 11 said a marked slowdown in the local economy and deteriorating world growth would cool inflation. Since then, Evidence has mounted that the US is lurching into recession and the global economy may be heading for a prolonged slump.

"Inflation concerns are receding rapidly," Westpac chief economist Brendan O'Donovan said in a report. "A worsening economic outlook as the international credit crunch bites will see previous capacity constraints relax."

The New Zealand dollar has declined about 8% this month and may extend its slide with the prospect of lower interest rates, falling commodity prices and weakening world demand.

"We don't expect the September quarter CPI print to get in the way of an aggressive easing cycle from the RBNZ," ANZ Bank economists said in a report yesterday.

The consensus of economists is for Bollard to reduce the OCR by 100 basis points to 6.5% on October 23 and to flag the potential for more reductions to revive an economy that may be in its fourth quarter of contraction.

A survey yesterday showed New Zealand manufacturing activity fell in September, its fifth monthly decline as companies trimmed production and got fewer orders.

By Jonathan Underhill

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