CPI news a dampener for interest rates

By BRIAN FALLOW

Softer than expected inflation in the March quarter has increased market expectations that the Reserve Bank will leave interest rates on hold next week.

The consumers price index rose 0.4 per cent, making 1.5 per cent for the year. That was below market expectations of 0.5 per cent and the Reserve Bank's forecast of 0.6 per cent.

The figures continue to show a wide gap between tradeable components of the CPI, which are influenced by the exchange rate and international competition, and the non-tradeable ones that reflect the domestic economy.

The dollar's sharp fall in recent weeks suggests the influence of lower import prices will weaken, but the latest quarterly survey of business opinion showed an economy operating at full stretch, with skilled labour hard to find and little spare capacity in the building and manufacturing sectors.

On the other hand the housing sector appears to have peaked and migration inflows have been waning for several months.

And some of the factors pushing domestic inflation higher, such as a 9.3 per cent rise in electricity prices and a 15.8 per cent increase in gas prices over the past year, are structural adjustments.

Deutsche Bank chief economist Ulf Schoefisch, who had been among a minority of analysts thinking that on balance the Reserve Bank would raise interest rates on April 29, now thinks it will opt to wait and see.

"The data has been mixed since they last reviewed the official cash rate, so you can find reasons for staying put or going."

The dollar has been lower than the bank expected, but its forecasts already assumed a depreciation in the second half of the year.

Bank of New Zealand economist Craig Ebert said the moderate inflation outcome for March bought the Reserve Bank more time to assess whether another rate increase was needed.

Westpac's Nick Tuffley said that the central bank could be increasingly confident economic growth was slowing, bringing respite on the inflation front.

The March inflation figures showed construction costs up 1.6 per cent in the quarter, and 8.7 per cent over the year.

They have been rising for 20 quarters in a row. But the latest quarterly increase was smaller than in the previous two quarters.

Although existing houses are not in the CPI, the steep rise in house price inflation has been reflected in a 19.2 per cent annual rise in real estate agents' fees, which rise in line with house prices.

Petrol prices rose 5.3 per cent in the quarter, but are still 0.3 per cent lower than a year ago.

The main downward influence was international air fares, which fell 11.8 per cent. Although a seasonal fall is normal, international fares are 20.9 per cent lower than they were a year ago.

Overall price rises were less widespread and price falls were fewer too, but larger.