Banks now believe NZ inflation will come in under 2pc

Inflation could fall as low as 1.1 per cent next year, BNZ believes.
MICHELE MOSSOP/FAIRFAX MEDIA

Inflation could fall as low as 1.1 per cent next year, BNZ believes.

Banks are dialling back their forecasts for inflation which they now believe has fallen below 2 per cent.

Statistics NZ will report the inflation figure for the year to June 30 on Tuesday.

The Reserve Bank forecast in May that the rate would come in at 2.1 per cent, but that was before the latest drop in the oil price.

BNZ and Westpac both now expect Statistics NZ will report annual inflation dropped to 1.8 per cent, down from 2.2 per cent three months ago when Australia's inflation was a comparable 2.1 per cent.

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 ASB Bank forecasts the latest rate will come in at 1.9 per cent.

Prices for some basics, including food, are rising at a faster rate. Statistics NZ reported last week that food prices were up 3 per cent on last year.

But easing inflation should be positive for homeowners worried about mortgage rates.

ASB said subdued inflation "coupled with the lacklustre growth over recent quarters" made it more likely that the Reserve Bank would keep interest rates on hold for another year.

Despite that, Westpac warned it still expected mortgage rates to "creep higher".

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ASB said borrowing costs in New Zealand were going up, in part because of expectations that the European Central Bank could soon announce plans to wind back its policy of "quantitative easing" – perhaps as early as Thursday but more likely later this year.

BNZ forecast annual inflation would slow to 1.6 per cent in the year to September and drop "all the way down" to 1.1 per cent by March next year.

Falling inflation shouldn't be taken as a sign the economy was struggling, it said.

By the time inflation bottomed out, there was a good chance the economy would have picked up pace, it said.

But Westpac warned the slowdown in the housing market could have important implications for the economy, given rising prices tended to encourage household spending.

"With mortgage rates expected to continue to push higher, and house prices to continue easing, this signals an important headwind for economic activity over the year ahead," it said.

 - Stuff

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