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Economists expect RBNZ will look through faster pace of inflation

Friday 12th October 2018

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Rising oil prices, Auckland's regional fuel tax, and a sharply weaker New Zealand dollar are likely to have pushed inflation higher in the third quarter but not enough to ruffle any feathers at the Reserve Bank.

Economists expect the consumers price index rose 0.7 percent in the three months ended Sept. 30, for an annual increase of 1.7 percent, according to the median in a poll of 14 economists surveyed by Bloomberg. 

While that is higher than the Reserve Bank's quarterly projection of 0.4 percent, and an annual rise of 1.4 percent, economists expect the central bank will look through transitory elements like rising fuel prices and seasonal factors such as an annual increase in local body rates. 

In September the central bank kept the official cash rate at 1.75 percent. It noted the impact higher fuel prices would have on near-term inflation, but said it would "look through this volatility as appropriate." It still expects consumer price inflation to "gradually rise" to the 2 percent annual target. Governor Adrian Orr indicated the next move could be up or down.  

"The combination of higher fuel prices and still-firm housing-related costs is expected to see the CPI rise 0.7 percent quarter on quarter, the highest quarterly lift since March 2017," ASB Bank economist Kim Mundy said. She expects inflation to be 1.7 percent higher on an annual basis. 

Prices at the pump have risen more than 4 percent in the quarter, with diesel up almost 8 percent. 

On the housing front, the annual local body rates rise is implemented on July 1, and Mundy said that appeared to be higher than normal across a number of regions.

"We also expect increases for rent, construction and property maintenance," she said.

However, Mundy said that increase doesn't represent a broad-based increase in underlying inflation pressures.

"We expect the RBNZ to largely look through these moves," she said. Mundy predicts the OCR won't move until 2020.

ANZ Bank New Zealand economist Miles Workman expects quarterly CPI rose 0.8 percent, lifting annual inflation to 1.8 percent, with a number of transitory factors at play. 

In particular "the perfect storm of a lower NZD, rising global oil prices and higher fuel taxes are expected to lift the petrol index 6 percent quarter-on-quarter, contributing 0.3 percent points to headline inflation," he said. 

The New Zealand dollar fell 2.5 percent against the greenback through the September quarter.

Workman, however, doesn't expect weak inflation to last.

"Sharply lower hiring and investment intentions, credit headwinds, margin squeeze, slipping export prices, a softening housing market, waning immigration, and policy uncertainty together suggest economic activity may struggle to keep inflationary pressures elevated," he said. 

Westpac Banking Corp senior economist Michael Gordon also said the rise in petrol and diesel prices was the "single biggest contributor" to his forecast for a 0.7 percent lift quarter-on-quarter and annual inflation of 1.7 percent. 

"Higher inflation caused by petrol prices certainly wouldn’t prevent the RBNZ from cutting the OCR if there were signs that the economy was faltering," he said. "But in the near term, it could make it harder to sell the idea that OCR cuts are needed for the purpose of generating more inflation."


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