Low inflation set to hold cash rate

Last updated 05:00 20/10/2014

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Low food prices over winter may see annual inflation down to almost 1 per cent in figures due out this week - good news for borrowers with no urgency for the Reserve Bank to lift interest rates any time soon.

Official September quarter inflation figures are due out on Thursday.

Bank economists are expecting a subdued September quarterly rise in inflation of about 0.4 per cent. That would take the annual rate to about 1.1 per cent, the lowest rate since the middle of last year and near the bottom of the Reserve Bank's inflation target band.

In the June year annual inflation was 1.6 per cent.

Besides low food prices, economists said smaller increases in petrol prices than last year and a high dollar were keeping overall annual price rises in check. That will leave the Reserve Bank room to keep interest rates on hold until well into next year, with some economists such as NZIER not expecting the next move up till 2016.

Annual inflation has been running under the central bank's 2 per cent mid-point target since the end of 2011. Another reading well under 2 per cent would "argue for an extended pause before resuming interest rate hikes," Westpac senior economist Michael Gordon said.

The Reserve Bank aims to keep inflation between 1 per cent and 3 per cent on average over the medium term.

ASB Bank economists also expected "modest" September quarter inflation of 0.5 per cent, driven by rising local government rates and construction costs.

With inflation so low, ASB said the Reserve Bank would keep official interest rates on hold at 3.5 per cent till March next year, before gradually lifting rates to a peak of 4.5 per cent by March 2016.

Westpac economists said food prices were "unusually low" this winter because of good growing conditions, helping keep inflation down.

Fuel price increases were smaller than last year, explaining most of the drop in the annual inflation rate.

Outside of house prices, inflation remained "subdued" with the high dollar earlier in the year still keeping down import prices.

Figures out last week showed food prices fell 0.8 per cent in September, as spring brought cheaper vegetables. Over the past year, food prices were down 0.1 per cent.

Another factor has been the price war on bread, which has been selling for as low as $1 a loaf.

Petrol prices rose slightly in the September quarter, reflecting the falling New Zealand dollar offset by a drop in international fuel prices.

But in the past week alone, petrol prices have dropped 6 cents a litre as world oil prices fell on worries about slowing global growth. The price of benchmark Brent crude has plummeted almost 30 per cent from US$114 a barrel in June to just US$83 last week.

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The high New Zealand dollar has also been keeping a lid on import prices for items such as clothes, cars and electronics.

ASB said the delayed impact of the fall in the currency would come through in higher import prices next year. It expected inflation to rise back to 2 per cent by the middle of next year.

- The Dominion Post


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