Inflation drop tipped to keep rates steady

Net income at Smiths City plunged 71 per cent in the year ended April 30. Photo / Bay of Plenty Times

The Reserve Bank is unlikely to raise interest rates until late next year, economists say, as figures show New Zealand's inflation rate has slowed to its lowest level in more than 18 months.

Consumer prices rose 1.9 per cent in the year ended June 30, Statistics New Zealand said yesterday. Inflation slowed from 3 per cent in the year to March as recession curbed consumer demand, prompting some companies to cut prices.

From the first quarter, prices gained 0.6 per cent.

The inflation rate has tumbled from an 18-year high of 5.1 per cent in the year ended September 30 amid the worst recession in three decades that has driven up unemployment and dented confidence.

However, the annual rate to June was higher than the 1.8 per cent median estimate in a Bloomberg News survey of 10 economists.

Reserve Bank Governor Alan Bollard has cut the official cash rate to a record-low 2.5 per cent and last month said he was unlikely to increase borrowing costs until late 2010.

The inflation rate fell back into the central bank's target range of between 1 per cent and 3 per cent for the first time since 2007.

Robin Clements, chief economist at UBS New Zealand, said lower inflation made it easier for the Reserve Bank to keep rates low. "We're still looking at the latter part of next year before rates are raised." Khoon Goh, senior economist at ANZ National Bank, said yesterday's data showed inflation was easing but not by as much as expected given weakness in the economy.

"Inflation is now at the mid-point of the Reserve Bank's target band, and we see it drifting lower still in the near-term, and remaining in the band for some time. It does not alter our view that the Reserve Bank is on hold until late next year."

Bollard last week forecast prices would rise 1.7 per cent in the year through June and just 0.7 per cent in the 12 months ending September 30.

Twenty-three per cent of companies cut prices in the second quarter, according to a survey by the New Zealand Institute of Economic Research. About 53 per cent of companies surveyed said profits fell.

Smiths City Group, an appliance and furniture retailer, said last month profit margins had "come under severe pressure" because of competition. Net income plunged 71 per cent in the year ended April 30, it said.

Bollard, who forecast the economy will start growing in the fourth quarter, this week said the nation may start recovering sooner than its major trading partners, prompting investors to increase bets he will raise interest rates.

The Governor will leave the official cash rate at 2.5 per cent at his next review on July 30, according to all 12 economists surveyed by Bloomberg.

Inflation accelerated last year amid soaring fuel and air travel costs. The consumer price index rose 1.6 per cent in the second quarter of last year and 1.5 per cent in the third quarter.

Many of those prices are now declining. Petrol prices declined 17 per cent from the year earlier and international airfares tumbled 21 per cent, the statistics bureau said yesterday.

Bollard's primary focus is on non-tradeable inflation, a core measure of prices that are not influenced by currency fluctuations and fuel.

Non-tradeable prices rose 0.5 per cent from the first quarter, the smallest gain in eight years. The measure gained 3.3 per cent from a year earlier.

Non-tradeable inflation was led by a 1.6 per cent gain in electricity charges and a 2.8 per cent jump in the price of beer.

The cost of buying and building a new house increased 0.2 per cent.

Tradeable prices rose 0.8 per cent from the first quarter led by higher fuel and used-car prices. International airfares fell 14 per cent in the quarter.

- BLOOMBERG