Low inflation keeps interest rates steady

Fairfax Media

GOOD NEWS: Inflation figures due out this week will be under 1.5 per cent for the year, leaving the Reserve Bank plenty of time before it needs to raise interest rates, say economists.

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Inflation figures due out this week will be under 1.5 per cent for the year, leaving the Reserve Bank plenty of time before it needs to raise interest rates, say economists.

September quarter inflation is likely to be about 1 per cent or slightly less, in figures due out on Thursday, economists said.

The annual inflation rate would be about 1.3 per cent to 1.4 per cent, reflecting a big slump in petrol prices, down almost 20 per cent on a year ago.

Overall inflation is expected to remain low for the next couple of years because of the slack created by the recession and the strong rise in the kiwi dollar, which is expected to keep import prices down.

"This short- term outlook suggests there is no urgency (for the Reserve Bank) to hike interest rates," Westpac Bank economists said, tipping annual inflation of 1.4 per cent.

The economy was still almost 3 per cent lower than the peak level of activity in late 2007.

It would take time before a economic recovery generated significant inflationary pressure, Westpac said.

With the economy starting to recover, the Reserve Bank would have a rate rise on the agenda by the middle of next year, or slightly sooner, Westpac said.

ASB Bank economists expected annual inflation of 1.3 per cent, but that would be the low point.

With a slow and weak economic recovery, inflation concerns would be "on the backburner for a while longer", ASB said.

Inflation was expected to remain below the 16-year average of 2.3 per cent both next year and the year after, ASB said.

Annual non-tradeable domestic inflation is expected to fall below 3 per cent for the first time since 2002, Westpac Bank said.

But there will still be some spots of inflation in this week's figures, including food, and local and central government charges.

Westpac Bank economists expected food prices to rise in the quarterly figures in the usual pattern over winter.

An early winter would boost food prices by almost 2 per cent in the September quarter, ASB Bank said. However, in August food prices fell almost 1 per cent after rising in the previous two months.

Groceries and fruit and vegetable prices fell.

A slight rebound in petrol prices and higher ACC levies on car registration would also be a factor in the September quarter inflation figures, Westpac said.

Higher government charges will also have an effect with the annual lift in alcohol excise tax and rising local authority rates.

Statistics New Zealand figures out last month showed general rates rose an estimated 5.4 per cent in the latest June year.

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