Rate cuts may have ended

BY DAVID HARGREAVES
Last updated 14:32 16/07/2009

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It appears increasingly likely there will be no more interest rate cuts from the Reserve Bank.

This was the view emerging today as the country's economists digested a consumers price index increase of 0.6 per cent in the June quarter, giving an annual rate of inflation of 1.9 percent.

While this was the lowest rate in nearly two years, it was somewhat higher than had been expected. The RBNZ had forecast 1.7 percent. A 0.9 per cent spike in food prices, led by a surge in the price of vegetables, was one contributor to the slightly higher figure.

While economists said the RBNZ would not be unduly concerned that the inflation figure was a bit higher than it had anticipated, the signs were nevertheless there that we may have seen the last of interest rate cuts.

The RBNZ has axed interest rates from 8.25 percent to 2.5 percent in the past year as it attempts to revive an economy in recession since the start of 2008. However, at its last rate review in June it took a pause. If the 2.5 percent rate proves to be the low point of the current cycle then it appears unlikely that the low, particularly fixed-rate, mortgages seen earlier this year are likely to be replicated.

Deutsche Bank chief economist Darren Gibbs said the inflation outcome, together with other developments both locally and abroad, "does tend to support our view that the RBNZ's easing cycle is over".

"We remain of the view that the RBNZ is likely to begin retightening [by raising rates] somewhat earlier than it currently envisages," Gibbs said. He picked that the RBNZ may start to move rates up again from about June next year - as opposed to the latter part of the year, as the RBNZ has previously indicated.

Apart from the rise in food prices, other significant contributors to the latest inflation rate were transport prices, which were up 0.6 per cent, mainly from higher prices for petrol and the purchase of second-hand cars.

Higher electricity prices pushed the household utilities and housing category up 0.4 per cent and the discounting prevalent in travel sent recreation and culture prices down 1.2 per cent mainly due to cut price overseas package holidays.

Commonwealth Bank of Australia New Zealand economist Chris Tennent-Brown said he expected the RBNZ would have "some tolerance" for inflation being higher than its expectations - given the depth of the current recession.

"Inflation below the [1 percent to 3 percent] target band is a greater concern in the near-term for central banks," he said.

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