Inflation a concern as Bollard holds rates

Inflation could approach 5 per cent over the year ahead if GST rises to 15 per cent, Reserve Bank forecasts imply.

The inflation rate is 2 per cent now and the bank warned yesterday that the impact of the emissions trading scheme from July 1 and larger than usual ACC levy increases would push it towards the top of the bank's target range, 3 per cent, in the short term.

That does not include the impact of the increase in the GST rate from 12.5 to 15 per cent which the Government has foreshadowed.

Statistics NZ calculates that would push the CPI up another 2 per cent. If enacted as expected in the May Budget the GST increase could come into effect as soon as October 1.

The Government has said the impact of the GST would be offset by increases in superannuation and benefit payments and in Working for Families tax credits, and by income tax cuts across the board.

The bank estimated the impact of the emissions trading scheme would add another 0.4 per cent to the CPI. Officials estimated last year it would add 5 per cent to retail power bills and 4c a litre to petrol and diesel prices.

The bank's forecasts are more cheerful about the employment outlook. It thinks the unemployment rate, at 7.3 per cent, is as high as it is going to get and that the economy will produce another 53,000 jobs over the next 12 months - as many as it shed during 2009. This is based in part on a belief that, where there is a choice, firms will prefer to expand by hiring than by investing in new plant and machinery.

But with the number of people chasing what jobs there are continuing to grow, the unemployment rate will come down relatively slowly, by about 1 per cent a year. And wages - always the last cab off the rank in an upturn - are projected to grow only weakly, by 1.8 per cent over the year ahead.

At this stage people are saving more than during the most recent boom, or reducing debt. "We are not clear yet how much that is an enduring effect," governor Alan Bollard said.

The bank said that even though the housing market was cooling house prices remained high, relative to incomes, and increases in mortgage rates would further affect affordability.

It expects house prices to go sideways, in real or inflation-adjusted terms, over the next three years.

As expected the bank left its official cash rate on hold at 2.5 per cent and reiterated it expected to begin raising it "around the middle of 2010".