Petrol and rents push inflation up, but leave interest rate outlook smooth

Rising petrol prices, along with airfares and higher rents are expected to have pushed inflation higher at the end of 2019, but not high enough to trouble policy makers. Photo / Jason Oxenham.

Rising transport and housing costs are likely to have pushed inflation into the Goldilocks zone for the Reserve Bank, dimming chances of a further cut in interest rates.

On Friday Statistics New Zealand will release the consumer price index for the final three months of 2019, which is expected to show household inflation rose close to 2 per cent, the highest level in 12 months.

Transport is expected to be largest contributor, with a rise in petrol prices at the end of 2019, strong demand for hire cars and the withdrawal of domestic services by Australian budget airline Jetstar driving a further lift in domestic airfares.

While the food price index fell slightly in December, ANZ said the fall was smaller than usual for the end of the year, with meat prices remaining elevated due to global demand and continued strength in restaurant meal prices.

The housing component of the survey is also likely to have risen, with persistent strong net migration pushing up rents and the prices of new houses.

ASB has forecast that the CPI will have increased by 0.4 per cent in the December quarter, taking annual inflation to 1.8 per cent, while on Friday ANZ pushed up its forecast for the CPI, predicting annual inflation will hit 1.9 per cent.

Stronger than the 1.6 per cent Reserve Bank forecast in November, this could put inflation almost exactly at the mid-point of the 1-3 per cent range it is tasked with keeping inflation at.

When the Reserve Bank slashed the official cash rate (OCR) by 50 basis points to an all-time low of 1 per cent in August, the second cut of the year, economists began to openly speculate that the rate could fall close to zero in 2020.

But a recovery in business confidence, improved economic data and a slightly toned down proposal for requiring banks to hold more capital has already pared back rate cut expectations.

Inflation in the so-called Goldilocks zone - not too hot to generate excess price increases and with little risk of deflation - would boost the odds that the OCR could sit at the current low for much of this year.

Last week ASB and ANZ, which have both forecast that the Reserve Bank could cut the cash rate in May as the economy failed to generate inflation, both acknowledged the odds of a cut have diminished.

"Looking forward, the recent recovery in the housing market and business sentiment ... and the promise of a little extra Government spending on key infrastructure – even if that is a slow-burn, medium-term story – mean the balance of risks to our forecast of an OCR cut in May is skewed towards this happening later, if at all," ANZ senior economist Miles Workman said.

ASB economist Mark Smith said the next move for the cash rate could be a hike, although the Reserve Bank was under little pressure to move either way.

"If the economy continues to display resilience then 1 per cent will be the lull in the OCR this cycle," Smith said.

"However, with inflation looking to be entrenched close to the inflation target midpoint and with the labour market backdrop displaying similar Goldilocks-type characteristics, the Reserve Bank has the luxury of waiting."

While the outlook for the OCR appears flat for some time, increased capital requirements could push interest rates for borrowers higher.

On Friday ASB lifted its floating base rate 5 points to 2.85 per cent.