Inflation touched the runway a bit lower than expected in today's figures, but that probably does not mean the Reserve Bank is going to hold off with the red paddles when it next reviews interest rates on 29 July.The consumer price index came in at 0.3% f
Inflation touched the runway a bit lower than expected in today’s figures, but that probably does not mean the Reserve Bank is going to hold off with the red paddles when it next reviews interest rates on 29 July.
The consumer price index came in at 0.3% for the June quarter, below the Reserve Bank (and the market consensus) figure of 0.5%.
That puts annual inflation at 1.8%.
The overnight index swap (OIS) market has priced in a rise in the official cash rate from 2.75% to 3% by Reserve Bank governor Alan Bollard.
The central bank will be looking at the prospects for inflation a year to 18 months out, and all today’s figure means is the starting point is a little lower than it expected.
That gives it a bit more leeway to hold off rate rises but the current rate is seen as still at stimulatory levels. The present relatively high dollar though helps keep some downward pressure on inflation.
Two key things need to be remembered: is the current cash rate is still at a stimulatory levels; and that today’s inflation figure, although lower than anticipated, is still high for the tail end of a recession.
That means the risks are for inflation getting on the high side – even without the “one off” government imposts of the emissions trading scheme, and rises in GST and accident compensation levies.
The Reserve Bank is most likely to raise the OCR at the next review or two and then pause later in the year, says Deutsche Bank New Zealand chief economist Darren Gibbs.
That will give its forecasters time to assess the impact of the GST increases on the economy over the summer.
On the positive side, says Bank of New Zealand economist Doug Steel, today’s inflation figure suggests “the RBNZ got policy about right in late 2008, early 2009. That was no mean feat.”
The hope is the central bank still gets it right as the economy slowly and haltingly emerges from recession.
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