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NZ inflation on the rise, central bank unlikely to waiver on record low rates

Reuters logo Reuters 18/04/2017

New Zealand's consumer price index (CPI) was expected to have finally hit the central bank target mid-point of 2 percent growth in the first quarter, after more than a year of concerted effort to lift tepid inflation.

Twelve economists polled by Reuters on average expected the CPI to climb 0.8 percent on a quarterly basis in data due out on Thursday.

Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington© REUTERS/Rebecca Howard Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington That would lift annual inflation to 2 percent for the first time since 2011, a milestone the Reserve Bank of New Zealand (RBNZ) had forecast would not be reached until mid-2019. 

Despite attaining the middle of its target band of 1 to 3 percent, the bank was thought unlikely to budge from its stance of keeping rates at 1.75 percent, possibly for years to come.

"Beyond the 'headline shock' of having inflation perhaps with a 2 in front of it (as it certainly feels like a long time since that has occurred), we doubt the numbers are going to shed a great deal of light on the outlook for inflation from here," said Phil Borkin, senior economist at ANZ.

"And so it is going to leave the RBNZ in a cautious, watchful stance."

Temporary factors, such as higher oil prices, unseasonably high fruit and vegetable prices and a hike in taxes on tobacco and alcohol would play into the first quarter jump, suggesting the index might soften somewhat throughout the year.

"We expect annual inflation will ease to between 1.5 to 2 percent over the remainder of 2017, as temporary drivers wane and we have an economy growing at or slightly above trend," said Kiwibank chief economist Zoe Wallis.

The RBNZ slashed interest rates throughout 2016 and now plans to hold steady for two years or more until it is comfortable inflation is safely back on track, as well as to account for increased global risks.

It was only in the fourth quarter of 2016 that inflation moved back above 1 percent, having spent more than two years under target.

High construction costs, and increased spending and demand for services from the country's record number of migrants and tourists have been underpinning rising prices.

(Reporting by Charlotte Greenfield; Editing by Eric Meijer)

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