Bloomberg News

N.Z. Inflation Slows, Giving Bollard Scope to Hold Rates

November 02, 2011

(Updates with comment from economist in fourth paragraph.)

Oct. 25 (Bloomberg) -- New Zealand inflation slowed by more than economists forecast in the third quarter, giving the central bank scope to keep interest rates unchanged at a record- low until next year. The local currency fell.

Consumer prices gained 0.4 percent from the second quarter, when they advanced 1 percent, Statistics New Zealand said in Wellington today. The median estimate in a Bloomberg News survey of 16 economists was for a 0.7 percent increase. Prices rose 4.6 percent in the year ended Sept. 30, slowing from a 5.3 percent year-on-year gain in the year through June.

The report showed the inflation rate, excluding the effect of a higher sales tax, was lower than central bank Governor Alan Bollard’s forecast last month. He is likely to keep the official cash rate at 2.5 percent until 2012 because underlying price pressure is modest while the European debt crisis threatens to spill over into weaker global growth, a survey of economists showed.

“With annual headline inflation easing, there is less pressure on the Reserve Bank to lift the cash rate,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “We still see the next move in the cash rate as up, but that will be next year’s story.”

Kiwi Falls

New Zealand’s dollar fell after the data. It bought 80.54 U.S. cents as of 11:35 a.m. in Wellington compared with 80.77 cents immediately before the report.

Fourteen of 18 economists surveyed last week by Bloomberg News forecast Bollard will leave the cash rate unchanged until at least January. All the economists expected no change at a review on Oct. 27 and four predicted an increase in December.

Bollard cut the cash rate in March to revive confidence after an earthquake devastated the southern city of Christchurch, killing 181 people and hurting spending. In September, he said intensification of global financial and economic risks justified keeping the benchmark unchanged.

Traders are betting rates may not rise until the second quarter next year. There was a 20 percent chance of a quarter- point rise in March, according to swaps prices quoted by Westpac Banking Corp.

Annual inflation slowed from a 21-year high that reflected government policies including an increase in sales taxes Oct. 1, 2010, that added an estimated 2.1 percentage points in the year through September.

Bollard’s Outlook

Bollard last month forecast that consumer prices rose 0.7 percent in the third quarter, and that annual inflation excluding one-time government policy changes would be 2.7 percent. Today’s report showed third-quarter annual inflation accelerated 2.5 percent using the previous sales-tax rate.

Bollard is required to keep inflation in a range of 1 percent to 3 percent on average.

Rising insurance and construction costs resulting from the Christchurch quake may boost core inflation in the next year, economists said. Inflation will average 2.9 percent in two years, according to the average of 67 forecasts received from local company executives, the central bank said Aug. 23.

In the third quarter, consumer prices were led higher by vegetable prices, local council land taxes and house insurance premiums, today’s report showed. Fuel fell the most since the fourth quarter of 2008.

Bollard’s primary focus is on non-tradable inflation, a core measure of prices that isn’t influenced by currency fluctuations and fuel.

Council Taxes

Non-tradable prices rose 0.6 percent from the second quarter, today’s report showed. The measure gained 4.5 percent from a year earlier.

Non-tradable inflation was stoked by council taxes which rose 4.1 percent. House rentals increased 0.5 percent and the cost of purchasing a new home, which reflects construction expenses, gained 0.8 percent. An annual excise tax increase raised beer prices, while dwelling insurance premiums rose 12 percent. Electricity prices fell as companies offered bigger prompt-payment discounts, the agency said.

Tradable prices advanced 0.1 percent from the second quarter, as gasoline fell 3.3 percent. Imported audio-visual and computing equipment prices declined 4.8 percent. Food prices gained as supply shortages led to an 18 percent jump in vegetable prices. From a year earlier, tradable prices were 4.6 percent more costly.

--With assistance from Daniel Petrie in Sydney. Editors: Brendan Murray, Garfield Reynolds

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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