Bollard pares back inflation expectations

Reserve Bank Governor Alan Bollard Photo / Mark Mitchell

Reserve Bank Governor Alan Bollard has pared back his expectation as to how high inflation will peak when the government's hike to GST comes into effect in October, and is warning firms against using the increase as a reason to lift their own prices.

The Reserve Bank has cut its expectation for a spike in inflation to "around 5 per cent or just below," from more than 5 per cent in the first quarter next year, as the full effects of the GST hike, introduction of the emissions trading scheme, and higher tobacco excise come into play.

"The key to ensuring no significant effect on inflation expectations is for businesses, labour groups and households not to use the GST increase as a veil to increase margins and wages," Bollard told a business audience in New Plymouth today.

"Doing so would simply spread inflation and harm the recovery."

The central bank is able to look through short-term spikes in inflation, and Bollard is concerned the jump higher in October will filter into wage-setting negotiations.

"He's saying the GST increase will lift headline inflation but shouldn't cause people to change underlying expectations for wages and prices - particularly wages since they are being compensated by lower taxes," said Darren Gibbs, chief economist at Deutsche Bank in Auckland.

"The bank wants to get in ahead and really emphasise that message,"
he said.

"Arguably Bollard doesn't want to stifle the recovery."

The kiwi dollar sank 0.3 per cent to 71.04 U.S. cents after Bollard said he won't "attempt to offset the immediate direct inflation impact of the coming policy changes" with monetary policy.

Markets cut their expectations for the central bank's tightening track again, with 57 basis points priced in, according to the Overnight Index Swap curve.

Bollard said the recovery wasn't "fast or robust" and lagged behind the rebound from the 1991 recession, though this was to be expected as the global financial crisis was a "once-in-a-generation event."