Inflation figures could prompt interest rate rethink

Inflation figures due out later this morning could see the Reserve Bank reviewing its intentions for raising interest rates.

The consensus market forecast for the June quarter consumer price index (CPI) is for a rise of 0.8% for the quarter and 5.5% for the 12 months. (the high annual figure is driven by the one-off GST rise)

Last week’s surprisingly good GDP figures – 0.8% for the March quarter (consensus forecast was for a 0.4% rise) and a revision of the previous quarter’s figures from 0.2% to 0.5% mean the economy is running stronger than most economists anticipated.

A higher than anticipated inflation result this morning would see the Reserve Bank’s current track for interest rate rises come forward.

The OCR is, at 2.5%, at a stimulatory level right now, and the Reserve Bank’s last monetary policy statement was interpreted to mean there would be no rate rises until December at the earliest, with many economists saying even that was too early.

Last week’s GDP figures indicated the economy does not require as much stimulus for as long as was previously thought: an OCR rise before the end of the year was seen by most economists as now being much more likely.

A high inflation figure today would make an OCR rise before December a near-certainty, although some of this would depend on how the currency markets react to such a figure.

The high New Zealand dollar has helped take quite a bit of inflationary pressure off the stimulatory OCR level, keeping imported inflation at very low levels.

“A high inflation figure today…would have markets pricing in more cash rate hikes and sooner; but we think inflation is more likely to print weaker relative to consensus and the impact would be symmetrical, pushing the ‘first hike’ consensus back towards first quarter 2012,” said TD Securities strategist Roland Randall.

Bank of New Zealand senior economist Craig Ebert, however, said that with clear signs the economy is improving, the Reserve Bank should not wait too long to remove the current stimulatory OCR levels.

“The risk around inflation is all one way, and there is a danger the Reserve Bank ends up playing catch-up, which is what happened a few years ago."

The Reserve Bank's next review of the OCR is scheduled for 28 July.