Annual inflation tipped to nudge 2pc

Last updated 05:00 15/07/2014

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Higher prices for electricity and food are expected to see annual inflation heading close to 2 per cent in figures due out tomorrow, with the Reserve Bank expected to lift official interest rates next week.

Economists expect June quarter inflation of about 0.4 per cent to 0.5 per cent and an annual rate of up to 1.9 per cent, which would be the highest rate for more than two years.

That would be close to the Reserve Bank's 2 per cent mid-point of its target band for inflation and so seen as another reason to lift the official cash rate to 3.5 per cent next week, Bank of New Zealand economists said yesterday.

But then the central bank is likely to pause, possibly lifting rates again in December, after the September general election, economists say. However if inflation is stronger than expected, interest rates could rise again sooner than December. If inflation is lower, the Reserve Bank's pause may be longer.

"The bigger picture is that the economy is speeding … growing faster than potential," BNZ said. The official cash rate would eventually rise to a peak of 5 per cent by early 2016, BNZ said.

The economy may be growing about 4 per cent and so a lot faster than the 2.8 per cent potential growth the Reserve Bank estimated last week, so that would eventually mean higher inflation.

BNZ is forecasting June quarter inflation of 0.4 per cent, taking the annual rate to 1.8 per cent.

The Reserve Bank earlier forecast quarterly inflation of 0.3 per cent for the June quarter.

ASB has forecast slightly stronger inflation at 0.5 per cent for the June quarter and 1.9 per cent for the year. While indicators pointed to "contained" inflation for the rest of the year, a growing economy should see inflation pick up next year.

Rising power prices and higher building costs were expected to see annual inflation pick up in the June quarter, along with a lift in food prices.

But the high New Zealand dollar has been keeping import prices down, with prices for cars and electronics falling. However, that impact is expected to wear off in the next year or two, as the New Zealand dollar weakens.

But the recent peaks in the currency may actually see annual inflation back down to 1.6 per cent in the second half of the calendar year, which may help convince the Reserve Bank to keep interest rates on hold after next week's move up, BNZ said.

The New Zealand currency has held up near post-float records despite big slumps in commodity export prices.

The dollar has been above US88 cents, despite dairy export prices slumping about 30 per cent from the peaks seen earlier this year, and log prices falling about 26 per cent.

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Typically the currency moves in line with changes in commodity export prices like dairy products which are New Zealand's top export commodity.

The next dairy auction is due early Wednesday morning. ANZ economists said the risks were tilted towards another fall in dairy prices tomorrow, given higher supplies in the near-term.

Given a firmer New Zealand dollar and weaker US dollar dairy prices, Fonterra was expected to scale down its forecasts for the new season dairy payout.

A payout of about $6.50 a kg would see dairy incomes cut about $3 billion compared with the record season just ended.

The fall in global dairy product prices should see a fall in price in supermarkets in time, too, helping keep a lid on food prices.

ANZ is also picking an annual inflation rate of 1.8 per cent for the June year in a slow rise as the high dollar offset the impact on inflation of a stronger domestic economy.

- Stuff

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