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The week closed with a slightly larger increase in inflation, giving the Reserve Bank cause for pause when it reviews the official cash rate later this month.
At 0.4%, price inflation is still well outside the Reserve Bank’s target range of 1-3% but is still higher than the central bank expected when it did its last forecasts six weeks ago.
The Reserve Bank was not an outlier in this: the average market forecast was for a 0.2% rise.
But this, plus a recent run of economic indicators suggesting post-dairy price drop is not having such a major effect on the wider economy, looks likely to cause Reserve Bank governor Graeme Wheeler to hold off a rate cut until at least December.
That is something he hinted at earlier in the week, in a speech to investment professionals in Auckland, when he defended the central bank’s inability to hit the price inflation target and also said any move to cut the OCR would be highly “data dependent”.
“Some further easing in the OCR seems likely, but this will continue to depend on the emerging flow of economic data,” was the core of Mr Wheeler’s speech.
Today’s CPI is an important part of that data.
But it is not the only part.
Today’s figures are historical – they relate to prices in the third quarter. The Reserve Bank - and other economists - expected the New Zealand dollar to keep declining.
Since then, though, it has moved the other way.
The recent rebound in the dairy price and business sentiment surveys which show firms still running investment above the long term trend, show the economy is not being hit quite so hard after all
And the New Zealand dollar is, on a trade weighted basis, more than 5% above where the Reserve Bank thought it would be by now.
So, in other words, the data is pointing both ways. A stronger dollar will mean less price inflation in the coming year – unless, of course, there is a lag effect from the 25% fall in the New Zealand/US dollar cross rate since last June.
At some point, it seems, New Zealand firms will have to put up prices. But with the labour market, also, not adding heat to the CPI – strong net migration means that despite rising participation rates, there has not been a flow into wage and salary increases, and with prices low there is little pressure coming from there either – the Reserve Bank can afford to wait a bit.
Mr Wheeler seems inclined to do so.
“We remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation. It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly.”
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NBR Radio
Fri, 16 Oct 2015