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Inflation probably back in RBNZ band

NZ Newswire logoNZ Newswire 19/01/2017 Rebecca Howard

Higher fuel prices have probably pushed New Zealand's annual inflation back above 1 per cent for the first time in more than two years in the December quarter.

Economists expect inflation was 0.2 per cent in the final three months of 2016 for an annual rise of 1.2 per cent, according to the median in a BusinessDesk poll.

The central bank is tipping annual inflation to be 1.1 per cent in the fourth quarter. The consumer price index rose 0.3 per cent in the third quarter of last year bringing the annual rate to 0.4 per cent. Annual inflation has not been higher than 1 per cent since the September 2014 quarter.

Fuel-driven inflation isn't unique to New Zealand as the price of crude oil has recovered from its slump in 2015.

While the increase will cheer the Reserve Bank of New Zealand, which is mandated with keeping inflation in a 1 per cent-to-3 per cent target band, economists say it won't have any impact on interest rates.

The RBNZ will take some comfort from the return to the target band "but the renewed strength of the New Zealand dollar means that inflation will remain subdued for some time yet," says Westpac acting chief economist Michael Gordon.

The central bank cut interest rates to a record low 1.75 percent in November in a bid to stoke inflation in an economy growing ahead of expectations. At the time, however, it signalled an end to the easing cycle, forecasting rates would stay on hold for the next two years.

ASB Bank economist Kim Mundy says the RBNZ may be relieved to see inflation back within the target band but enough downside risks remain for the RBNZ to keep the OCR on hold for the foreseeable future.

The data is due to be released next Thursday, the same day Reserve Bank governor Graeme Wheeler will deliver an off-the-record speech to the Canterbury Employers' Chamber of Commerce in what's traditionally been a state of the nation address.

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