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Inflation probably back in Reserve Bank band after 2-year undershoot

The RBNZ will "take some comfort" from the return to the target band

Rebecca Howard
Fri, 20 Jan 2017

Higher fuel prices probably pushed New Zealand's annual inflation back above 1 percent for the first time in more than two years in the December quarter.

Economists expect inflation was 0.2 percent in the final three months of 2016 for an annual rise of 1.2 percent, according to the median in a BusinessDesk poll. The central bank is tipping annual inflation to be 1.1 percent in the fourth quarter. The consumer price index rose 0.3 percent in the third quarter of last year bringing the annual rate to 0.4 percent. Annual inflation has not been higher than 1 percent since the September 2014 quarter.

Fuel-driven inflation isn't unique to New Zealand as the price of crude oil has recovered from its slump in 2015. US consumer prices jumped above 2 percent for the first time in two-and-a-half years last month, according to consumer-price index data released this week. Elsewhere, December inflation accelerated in Germany to its highest level since July 2013.

While the increase will cheer the Reserve Bank of New Zealand, which is mandated with keeping inflation in a 1 percent-to-3 percent target band, economists say it won't have any impact on interest rates.

The RBNZ will "take some comfort" from the return to the target band "but the renewed strength of the New Zealand dollar means that inflation will remain subdued for some time yet," said Westpac Banking Corp acting chief economist Michael Gordon.

The New Zealand dollar has remained persistently high as the nation's relatively upbeat economic outlook continues to make it attractive in an uncertain global environment.

Also, with inflation still at the lower end of the range and likely to remain so for a while longer "there's no case for withdrawing the monetary stimulus that the RBNZ has applied over the past couple of years," said Gordon. Westpac is expecting a 0.2 percent increase in CPI for the quarter, which will bring annual inflation to 1.2 percent.

The central bank cut interest rates to a record low 1.75 percent in November in a bid to stoke inflation in an economy growing ahead of expectations. At the time, however, it signalled an end to the easing cycle, forecasting rates would stay on hold for the next two years.

ASB Bank economist Kim Mundy said the RBNZ may be "relieved" to see inflation back within the target band but "enough downside risks remain for the RBNZ to keep the OCR on hold for the foreseeable future," she said. Among other things, the New Zealand dollar remains high on a trade-weighted basis and this will continue to be a drag on tradable inflation, she said. ASB expects the CPI to register a 0.2 percent increase in the fourth quarter, with annual inflation jumping to 1.1 percent.

ANZ Bank New Zealand senior economist Phil Borkin said inflation pressures will gradually rise over the course of 2017 but warned that deflationary pressures - including the high dollar and a competitive retail environment - will ensure it "doesn't run away". The RBNZ "needs (and will likely want) to see the whites of the eyes of inflation before tightening," he said. ANZ is forecasting a 0.3 percent quarter-on-quarter CPI result and annual inflation of 1.2 percent.

The data is due to be released next Thursday, the same day Reserve Bank governor Graeme Wheeler will deliver an off-the-record speech to the Canterbury Employers' Chamber of Commerce in what's traditionally been a state of the nation address.


Rebecca Howard
Fri, 20 Jan 2017
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Inflation probably back in Reserve Bank band after 2-year undershoot