The Reserve Bank has pulled back its inflation forecasts.In an unannounced speech to the Taranaki Chamber of Commerce today, Reserve Bank governor Alan Bollard said the central bank now thinks Consumer Price Index (CPI) inflation will spike at “arou
The Reserve Bank has pulled back its inflation forecasts.
In an unannounced speech to the Taranaki Chamber of Commerce today, Reserve Bank governor Alan Bollard said the central bank now thinks Consumer Price Index (CPI) inflation will spike at “around 5% or just below.”
The bank’s earlier forecast, contained in its June monetary policy statement, was for the CPI to peak at 5.4%, as the GST increase and other rises, including hikes in accident compensation levies, the impact of the emissions trading scheme on energy prices and changes to how life insurance policies are taxed are passed into prices.
“The spike in inflation is expected to be short-lived. The inflationary effects should be largely out of the system by later next year.
“Our industry intelligence to date suggests the GST increase is not being treated as a big disruptive event by the retail industry. Pre-stocking does not appear major, nor does pre-purchasing, and a last quarter sales fall-off is not expected.”
The central bank now believes many firms will not pass on all those costs but is urging them to remain restrained as the economy picks up.
“As the economy grows, employment levels are expected to increase and plant and equipment will be worked harder. As this occurs, underlying inflationary pressures are likely to gradually increase, but consumer price inflation is forecast to remain comfortably inside the target band in the second half of our forecast horizon.”
Implicitly, Dr Bollard appears to be further signalling the anticipated track of interest rate rises over coming months will now be much more gradual than it appeared in early June, when he began lifting the official cash rate.
The OCR is now at 3% following two 0.25% rises in June and July. Until two weeks ago all bank economists predicted a further rate rise at the next review, on September 16 and at least one more before the end of the year.
The OCR is still at stimulatory levels and, although there is some debate over just what would be seen as “neutral,” most economists regard it as being somewhere 4.5-5%. The Reserve Bank itself does not formally have a view of what “neutral” is.
The run of economic data since the last set of Reserve Bank forecasts has been less upbeat than expected, with unemployment, manufacturing and housing market data being particularly negative.
