Interest rates tipped to rise despite CPI dip

Most economists are tipping Reserve Bank Governor Alan Bollard to lift the Official Cash Rate by 25 basis points later this month, despite this morning's soft CPI stats. Photo / Mark Mitchell

Economists expect the Reserve Bank will raise interest rates further late this month, despite lower than expected inflation figures.

Statistics New Zealand (SNZ) today said the consumer price index (CPI) rose 0.3 percent in the June quarter, taking the annual rate down to 1.8 percent. The median prediction in a Reuters poll of economists had been for a quarterly rise of 0.5 percent.

The most significant rise during the latest quarter was an 8.7 percent increase in the price of cigarettes and tobacco. Had those been unchanged from March, the CPI would have risen by just 0.1 percent, SNZ said.

Cigarette and tobacco prices in the June quarter were affected by a 10 percent rise in excise on cigarettes at the end of April, while excise on tobacco rose 25.4 percent.

ANZ chief economist Cameron Bagrie and economist Mark Smith said the CPI figure in the June quarter would be the last subdued rise for a while.

Various government-related policy changes were set to lead to large rises in inflation in coming quarters, with annual headline inflation set to top 5 percent.

Despite that, the starting point was better than the Reserve Bank had been expecting, the ANZ economists said.

Inflation from the troublesome housing group had remained contained in the June quarter, with rents rising 0.5 percent, to be up 1.4 percent for the year.

"If there were indeed a housing shortage in the country, rents would be up strongly by now," said Bagrie and Smith.

Construction costs also remained well contained, rising 0.4 percent, which suggested construction firms were absorbing some increases in their margins, given rising prices for building materials.

While the details of the June quarter CPI suggested firms lacked pricing power, the Reserve Bank would remain wary of firms seeking to claw back margins by increasing prices by more than the upcoming rise in GST.

In an environment where momentum in the economy had levelled out as opposed to accelerating, the ANZ economists said they continued to favour a somewhat staggered tightening cycle.

That would include a 25 basis point rise in the official cash rate (OCR) at the end of the month, and probably another in September, before the Reserve Bank paused in the fourth quarter.

ASB chief economist Nick Tuffley and economist Christina Leung said they expected the Reserve Bank would continue to increase the OCR in 25 basis point increments in the coming year, in order to keep inflation pressures in check.

The proportion of goods in the CPI basket which increased in price continued to rise during the June quarter.

That indicated price rises were becoming more broad-based, in line with views of a lift in underlying inflation as economic activity recovered, the ASB economists said.

Recent business surveys pointed to growing inflation pressures ahead, with capacity utilisation having trended up to elevated levels, and businesses reporting more difficulty finding skilled staff, pointing to wage pressures in the coming year.

- NZPA