Inflation nudges down

JAMES WEIR AND ELLEN READ
Last updated 11:22 16/04/2014

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Lower-than-expected inflation has cast doubts on the need for the Reserve Bank to lift interest rates as far and as fast as expected, economists say.

Annual inflation is down slightly to just 1.5 per cent for the year to March and 0.3 per cent for the quarter, Statistics New Zealand said this morning.

Without higher taxes on tobacco in January, overall prices in the March quarter would not have moved. Higher tobacco and housing prices were partly countered by seasonally cheaper international air fares, vegetables and package holidays.

The lower than expected inflation figures will take the heat off the Reserve Bank to raise interest rates as much and as early as expected.

Last month, the bank increased the OCR - the central bank's key tool to influence the inflation rate - from 2.5 per cent to 2.75 per cent, the first of a series of projected rises over the next two years.

A further hike is still expected next week but further out, forecasts are now being pulled back.

Westpac economists responded saying that the numbers ''reduce the urgency for the Reserve Bank to hike the [Official Cash Rate] OCR''.

They said domestically generated inflation continued to rise so they were still forecasting hikes for April and June.

''However, low inflation plus the high exchange rate and falling dairy prices, taken together, have placed a cloud over our forecast for a July OCR hike,'' Westpac said.

ASB chief economist Nick Tuffley said that despite rising spending and consumer confidence, retailers were struggling to pass on price increases.

A hike next week was a ''done deal'' ASB said, but then the central bank may wait till july before moving again, though a June move remained a high risk.

''With [inflation] not suggesting much urgency, that leaves us looking to next week's OCR statement for how much of an influence these two key factors are having on the RBNZ's outlook and any sense of urgency to deliver a third consecutive OCR increase.''

The rapidly dropping world dairy prices and a stubbornly high New Zealand dollar meant the Reserve Bank would be cautious, ASB said.

The New Zealand dollar initially dipped almost half a US cent this morning, trading at about US86 cents.

Economists have been warning that floating mortgage rates, which have sat around 5.75 per cent for more than three years, could rise to about 8 per cent by 2016.

With the majority of mortgage customers on either floating or short-term fixed rates, the increases will quickly hit borrowers in the pocket.

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- Fairfax Media

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