Low inflation raises prospect of interest rate

By JIM EAGLES

Inflation is on a three-year low and falling, to judge from the consumer price index for the first three months of the year.

Statistics New Zealand said yesterday the CPI rose just 0.4 per cent in the March quarter, confirming views that the economy is cooling, and raising the likelihood of an interest rate cut later in the year.

That level of increase, which takes the annual inflation rate from 2.7 per cent to 2.5 per cent, was slightly lower than economists had been expecting.

It is also the lowest quarterly rise - excluding the anomalous drop caused by the cut in state housing rentals early in 2001 - since the December 1999 quarter.

Furthermore, Statistics New Zealand's figures show that, excluding variables such as fruit and vegetables, petrol or changes in Government policy, core inflation is running at a mere 0.1 per cent - the lowest quarterly figure for core inflation since early 1999.

The prospects for the future are for inflation to drop even lower.

Slightly over half the March quarter increase was the result of a sharp jump in petrol prices because of war worries and that has already reversed.

As Ulf Schoefisch, chief economist for Deutsche Bank, put it, "That's downward pressure of 0.2 per cent for the next quarter right from the outset".

The other main driver in the March quarter was, predictably, housing, with construction costs up sharply and additional rises in rents and real estate fees.

However, the latest figures for house sales and building consents suggest those markets may have peaked.

Westpac senior economist Nick Tuffley describes those figures as "an early indicator that the recent strength of housing construction will slow in the second half of 2003".

The annual rate of inflation will almost certainly fall a lot further when the next quarterly figure is announced because it will replace the 1 per cent jump recorded in the June quarter last year.

Schoefisch speculated that the increase in the CPI next quarter could be another 0.4 per cent, taking the annual rate to 1.9 per cent.

"If the present trend continues - and we expect to see the rising kiwi dollar having a much bigger effect - the annual rate could be down to 1.7 per cent in the September quarter."