Rate rise tipped by year's end

20:20, Jul 16 2013

The Reserve Bank may start lifting official interest rates as soon as the end of the year, despite annual inflation running under the central bank's target band for a year, some bank economists say.

Statistics NZ figures out yesterday showed annual inflation has dropped to just 0.7 per cent, the lowest level in almost 14 years, with higher power and housing costs offset by lower petrol and car prices in the June quarter.

But some economists argue that inflation has probably hit its low point, with the high dollar pushing down import prices for cars, clothing and electronics.

Audio-visual equipment such as televisions alone fell 14 per cent in the past year.

But that benefit for consumers is waning, with the currency falling recently, most notably lifting petrol prices sharply in the past month.

And there are pockets of domestic inflation, with construction costs up more than 4 per cent in the year, boosted by post-quake rebuilding in Canterbury, where building costs jumped 12 per cent.


June-quarter inflation was just 0.2 per cent, according to Statistics New Zealand figures, taking annual inflation to 0.7 per cent.

Economists had generally expected annual inflation to be about 0.8 per cent, but car prices fell more than expected, with the big drop in the Japanese yen meaning cheaper cars from New Zealand's key source of new and second- hand cars.

UBS economist Robin Clements said UBS expected the Reserve Bank to start lifting the official cash rate from 2.5 per cent in December, taking it to 3.75 per cent by the end of next year.

The bottom line was that the domestic economy was heading down the path of stronger growth and emerging inflationary pressures, especially in housing costs.

Tradeable prices for goods such as imports of cars and electronics have been falling thanks to the exchange rate, which had been extremely high earlier on, but has since fallen.

Without the help of falling import prices, headline inflation was expected to rise "quite quickly". That meant it would no longer be appropriate to hold the OCR at an all-time low of 2.5 per cent, Clements said.

HSBC also expected inflation to rise, as the effect of the falling dollar hit home and the economy started to get closer to full capacity. The Reserve Bank "may need to begin contemplating rate hikes, potentially before the end of this year", HSBC said.

The New Zealand dollar had fallen more than 6 per cent, measured against a basket of other currencies, since its peak in April. As a result, tradeable inflation would start to rise and retailers would start to pass on higher import costs, HSBC said.

ASB Bank economist Jane Turner said that while inflation had been below the Reserve Bank's target band of 1 per cent to 3 per cent for a year, it was expected to rise in the next few years.

The recent fall in the dollar would see tradeable inflation rise and, with consumer demand starting to improve, retailers would probably recover profit margins in coming quarters.

Contact James Weir
Business editor
Email: james.weir@dompost.co.nz