Banks say inflation likely to stay low

ROELAND VAN DEN BERGH
Last updated 05:00 16/01/2012

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Cheaper food, televisions and internet access are expected to drive down inflation and should ensure mortgage interest rates stay low this year, economists say.

ANZ and ASB banks expect prices to have increased just 0.2 per cent in the December quarter, taking annual inflation to 2.4 per cent.

Westpac believes prices were flat during the quarter for an annual figure of 2.2 per cent.

Both numbers are below the 2.6 per cent forecast by the Reserve Bank in December.

Inflation would fall sharply from 4.6 per cent for the year to last September largely due to the one-off rise in the rate of GST in October 2010 washing out of the figures.

Shoppers keeping their wallets in their pockets, combined with the strong New Zealand dollar would keep a lid on prices, particularly for consumer durables such as televisions.

Westpac said businesses had also sharply pulled back on their intentions to raise prices this year which should keep inflation pressures in check in the near term.

It expects annual inflation to bottom out at 1.5 per cent by the middle of this year, near the bottom of the Reserve Bank's target range of between 1 per cent and 3 per cent.

ASB said the inflation outlook meant there was "little urgency for the Reserve Bank to raise the Official Cash Rate" from the record low 2.5 per cent before the end of this year.

That should see floating mortgage rates stick between 5.65 per cent and 5.99 per cent.

Westpac expected a large drop in vegetable prices to balance out modest price increases in other goods and services in the December quarter.

"In the first half of last year, the seasonal rise in vegetable prices was much greater than usual, due at least in some part to flooding in Australia, which meant that during the winter months, imports of key items such as tomatoes were harder to come by."

However, between August to November, vegetable prices more than fully reversed these increases and some items are now cheaper than a year ago, Westpac said.

Food prices for December are due to be published today.

Competition among telecommunications companies had also led to a sharp falls in the effective cost of internet access.

Data caps for standard broadband internet packages doubled to 60 gigabytes a month during the second half of last year, effectively halving the per unit price of data. This would have a "meaningful impact on the price index", Westpac says.

ANZ said the Rugby World Cup also did not appear to have had a significant impact on inflation with premiums charged on accommodation and airfares inline with "typical" seasonal increases.

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But on the flip-side most other items in the basket of goods and services that make up the index had increased slightly, with fuel prices up the most, economists said.

Fuel prices could rise further due to the rising tensions between Iran and the West and the threatened closure of the Strait of Hormuz oil route, ANZ said.

Housing-related costs, including construction, rents and insurance were all expected to rise further this year as the Christchurch rebuild gets under way and insurance companies pass on their higher cost of reinsurance to customers.

- Wellington

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