G20: Inflation likely to pick up as labour market pressures emerge - English

New Zealand inflation, which unexpectedly fell to the bottom of the Reserve Bank's target band in the third quarter, is likely to pick up again as pressures emerge in the labour market, Finance Minister Bill English said.

Economists have pushed out their expectations for New Zealand interest rate hikes after a report last month showed consumer prices rose at an annual rate of 1 percent, lagging the Reserve Bank's 1.3 percent forecast. The bank aims to keep inflation within a 1-to-3 percent band.

"We are all just adjusting to the fact that New Zealand inflation is lower than we expected," English said on the sidelines of the G20 Leaders' Summit in Brisbane. "At the moment there is a fair bit of work going on to try and untangle why it is that we've got pretty significant growth" with little inflation.

While housing market growth has slowed, it is still growing, and the country has high levels of net migration, he said.

"All of those things would lead you to think you were going to have quite a lot of inflation pressure," he said. "It could be it's just going to take awhile to show up or it could be that the global deflationary pressures are keeping our inflation rate down."

The New Zealand economy expanded at a 3.5 percent annual rate in the second quarter and Reserve Bank governor Graeme Wheeler has said he expects the local economy to expand 3.7 percent this year, supported by building activity, consumer spending and business investment. Data this month showed a strengthening labour market is soaking up an increased supply of new migrants and returning kiwis, though as yet not feeding through into wage inflation.

"In the longer term, it would be a good thing if we can grow at a higher rate, like 3 percent, and have 1 percent inflation," English said. "That would be great. But in my view it is unlikely to stay that way. We are going to get pressure in our labour market in particular so I don't think we should believe that the risks of inflation have disappeared but they may take a bit longer to show up."

English said he couldn't predict whether inflation would dip below the 1 percent lower limit of the target band.

"There's some pretty powerful forces out in the world economy," English said, citing 15 months of declining Chinese producer prices, which affects the price of goods that New Zealanders end up buying.

"That has an impact around the whole world," he said.

(BusinessDesk