Inflation eases back within central bank's target band

By Paul McBeth

Friday 17th April 2009

New Zealand's annual rate inflation slowed to 3%, back within the central bank's target band and the lowest since the third quarter of 2007, giving Governor Alan Bollard room to cut interest rates later this month.

The consumer price index rose 0.3% in the first quarter, matching economists' forecasts, according to Statistics New Zealand. Transport prices fell 1.5%, leading four of the 11 CPI groups that recorded a decrease, dragged down by dwindling demand for overseas travel and falling oil prices.

The Reserve Bank has room to cut the official cash rate to as low as 2% in 2009 to stimulate an economy forecast to shrink 2.8% this year, the Organisation for Economic Cooperation and Development said yesterday. The first step is likely to be a 50 basis point cut to 2.5% on April 30, economists say.

Inflation "was broadly in line with expectations, and sent a clear sign inflationary pressures are starting to ease," said Khoon Goh, senior markets economist at ANZ National Bank. "Markets are firming to a 50 basis point cut" when the Reserve Bank reviews the OCR this month, he said.

The New Zealand dollar rose to 57.31 US cents after the announcement from 57.12 cents before the figures were released. It recently traded at 57.44 cents, and has fallen 2.9% this week. The NZX 50 Index rose 0.7% to 2681.32 today and has climbed 4% in the past 10 days amid speculation prices already reflect the worst economic news, that sent the index to a five-year low last month.

The economy shrank 0.9% in the three months to December 31, its fourth consecutive contraction, and may have shrunk a further 0.8% in the first quarter according to the Reserve Bank.

The biggest upwards pressure on consumer prices came from the food group, and alcohol and tobacco, which rose 1.2% and 1.8% respectively. Soft drinks were up 3.9% and bread increased 4.6%. The price of beer rose 3.2% as increasing costs of production were passed on to consumers, while extra excise duty pushed up cigarette prices 4.2%.

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