Inflation running at 0.8 pc in September year

JAMES WEIR
Last updated 11:48 16/10/2012

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Inflation has hit a 13-year low of just 0.8 per cent in the year to September 30, according to Statistics New Zealand, reflecting a high New Zealand dollar and a slack domestic economy.

Westpac economists said the unexpectedly low rise in the cost of living was due to some quirks in the figures meaning an interest rate cut by the Reserve Bank as a result remained a ''risk scenario rather than a likelihood''.

But the Green Party immediately said inflation was below the Reserve Bank's 1-3 per cent target band, giving the central bank scope to cut official interest rates from 2.5 per cent later this month.

A lower cash rate was likely to lead to lower domestic interest rates which, in turn, would take pressure off New Zealand's overvalued exchange rate, helping exporters and manufacturers who compete with imports, the Greens said.

"Low inflation gives the Reserve Bank generous scope to cut the OCR as a first step to addressing our overvalued currency," said Green Party Co-leader Dr Russel Norman.

The New Zealand dollar dipped after the inflation figures came out, falling from almost US81.80c to recently trade just under US81.60c.

Most economists had expected annual inflation to be 1 per cent, the same as for the year to June 30, though some tipped a slightly lower rate of 0.9 per cent.

Annual inflation was extremely low in part because of slumping electronics prices, with audio-visual gear down 18 per cent in the past year, milk down more than 9 per cent on a year ago and phone service costs also sharply lower.

Westpac pointed out that September quarterly inflation of 0.3 per cent was low in part due to quirks that were not likely to be repeated: a 2.8 per cent drop in second hand car prices and a near 8 per cent fall in domestic air fares.

In contrast the cost of house building rose 3 per cent in the September and 1 per cent in the quarter. But the annual rise in building costs in Canterbury was almost 10 per cent.

''Our concern is that the Canterbury rebuild will boost housing-related inflation, eventually forcing the Reserve Bank to increase the OCR. This story still looks very much on track,'' Westpac said.

Inflation has been low for the past year, in part because of the high New Zealand dollar holding down import prices. A subdued local economy has also meant retailers have had little scope to push up prices, keeping a lid on things like clothing and household appliance prices.

However, economists say the rebuilding work in Canterbury after the big earthquake will put pressure on construction costs to rise, and that could flow through to wider inflation pressures around the country.

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While inflation is at 13-year lows, economists expected annual inflation to drift back up to more than 2 per cent by late next year.

- BusinessDay.co.nz

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