ASB picks inflation to stay low

Reserve Bank museum administrator Barry Norton silhouetted against their giant five dollar note window. NZH File pic

ASB Bank expects New Zealand's annual inflation to remain under the Reserve Bank's 1 to 3 per cent range for much of 2015.

The bank, in its preview of Statistics New Zealand's consumers price index (CPI), which is due out on January 21, said it expects the index to be flat over the December quarter, making for a 0.9 per cent rise over calendar 2014, and down from an annual 1.0 per cent in the year to September.

"The key development over the December quarter has been the sharp drop in global crude oil prices, which has driven the price of petrol lower," the bank said.
ASB expects the Reserve Bank to keep the official cash rate on hold at 3.5 per cent until at least December this year.

New Zealand petrol prices have fallen from over $2.20 per litre at the beginning of October to under $1.80 in January.

"We estimate the decline in fuel prices means a 0.3 percentage point reduction in the CPI for Q4, with a bigger reduction in store for Q1," ASB said.

The bank assumed crude oil prices would remain low over much of 2015, which would result in a low inflation outlook for 2015.

"We now expect headline inflation will remain below the RBNZ's inflation target band of 1-3 per cent over much of 2015," the bank said.

The Reserve Bank, which is charged containing annual CPI inflation with a 1 to 3 per cent range, can "look through" the direct first-round effects of oil price changes.

ASB said that while reducing inflation, lower petrol prices also act like a tax cut increasing households' discretionary spending power.

Ultimately, what matters for the Reserve Bank will be any second-round effects on inflation of the changes in petrol prices, such as changes to the price and wage-setting behaviour of firms and households, ASB said.

"Nonetheless, the low inflation environment provides further reason for the Reserve Bank to hold off lifting the official cash rate for some time," it said.