NZPA

Inflation pressures RBNZ to raise rates sooner - maybe

Thursday October 15, 04:20 PM

Higher than expected inflation in the September quarter is seen as putting pressure on the Reserve Bank to raise interest rates earlier than intended, but not all economists agree.

Figures from Statistics New Zealand (SNZ) today show the consumers price index rose 1.3 percent in the three months to September, taking the annual rate to 1.7 percent.

While the annual rate of inflation was the lowest for 5-1/2 years, it was still above the median forecast in a Reuters poll of economists which had been for a rise of 1.2 percent. The quarterly forecast had been for a rise of 0.8 percent.

ANZ bank said today's data would continue to underpin the market's current view towards an earlier tightening cycle than the Reserve Bank's intention of a rise in interest rates towards the end of 2010.

"This is now a risk that must be acknowledged and sees the bias look towards the first interest rate hike coming earlier than the September 2010 start we had initially envisaged," ANZ said.

ASB economists said the inflation outcome and recent acceleration in house prices would make the Reserve Bank more reluctant to leave the official cash rate unchanged until the latter part of 2010.

Since the Reserve Bank's monetary policy statement in September, the ASB economists had been looking to a June start to the rate tightening cycle.

"We now see April as the more likely timing."

But BNZ Capital head of research Stephen Toplis said the inflation rate was "no hike catalyst".

He still believed inflation would fade as 2010 progressed. That was due to the combination of plenty of spare capacity in the economy, including rising unemployment, and the disinflationary impact of the soaring NZ dollar.

BNZ expected annual inflation of 1.4 percent in calendar 2010, well above the 0.7 percent it previously forecast but still within the Reserve Bank's 1 percent to 3 percent target band, Mr Toplis said.

The inflation data supported the BNZ view that the Reserve Bank would not be able to stick to its published stance that rate hikes would start in the December quarter of 2010.

"What it doesn't say, however, is that the RBNZ should be shifting its view towards a January hike given that the inflation outlook remains benign," he said.

The last thing the New Zealand economy needed now was a closure of the gap between interest rates in this country and Australia, and the generalised upward pressure on the NZ dollar that would tend to imply.

SNZ prices manager Chris Pike said the rise in the September quarter CPI was driven by higher food prices and international airfares, and by levy, excise and tax rises that usually happened at this time of year.

Food prices were up 1.7 percent in the third quarter, driven by higher vegetable prices.

International air transport was up 11 percent in the same period, rising from historically low levels in the June 2009 quarter.

Vehicle relicensing fees rose 16.2 percent reflecting a rise in the ACC levy, local authority rates rose 5.6 percent, and alcoholic beverages rose 2.5 percent with higher excise duty from July.

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