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One-Off Reduction To CPI Inflation In 2001

Data Flash (New Zealand)

NZ Change To State House Rental Policy Will Provide One-Off Reduction To CPI Inflation In 2001

Q1 2001 CPI forecast lowered from 0.8% qoq to 0.2% qoq

Statistics New Zealand has set out how they plan to treat the impact of the Government's 1 December change to state house rental policy.

To recap, the policy change involves a move away from market related rentals (with low income tenants obtaining an income top up through the accommodation allowance) to rentals set on the basis of tenants' income levels.

State house rentals account for one-fifth of the 6.16% weight of rentals in the Consumers Price Index (CPI). This component will fall in Q1 to reflect the fall in the average rental on state house properties following the policy change. Housing New Zealand officials advise that the average state house rental is estimated to have fallen from $166pw prior to the policy change to $89pw after. The latter figure is subject to further downward revision as officials continue to process applications from tenants who seek to move to the lower rental rate. Therefore, the Q1 CPI is likely to record a 50% decline in the average state house rental rate, translating into a 10% decline in the overall rental component. This will lower the Q1 2001 CPI by around 0.6%qoq relative to previous forecasts. As a result, Deutsche Bank's own forecast is lowered from 0.8% qoq to 0.2% qoq.

As a result, after rising to 3.6% yoy in Q4 2000 (assuming a 0.8% qoq rise), the yoy rate would fall to 3.1% in Q1 2001 (compared with the RBNZ's forecast of 3.8% yoy).

Implications for Monetary Policy

It is important to stress that the RBNZ's focus is on underlying or core inflation pressures, abstracting from one-off effects that push the headline rate higher or lower.

The central policy scenario in the RBNZ's 6 December MPS assumed no significant second-round inflation effects. The impact of this today's announcement is to somewhat reduce the risk of significant second-round inflation developing. Therefore, in principle, today's announcement should not alter the RBNZ's central view of medium-term inflation pressures and of the policy response that that view most likely implies. However, it will make the Bank more comfortable that its assumption of no significant second round effects is not too optimistic.

At the margin, therefore, today's announcement may have some bearing on the Bank's decision when it comes to review monetary policy settings again on 24 January.

It remains our view that, although a move in January can not be ruled out, a 25bp hike on 14 March is a more likely scenario. This reflects our view that both the Q3 GDP and Q4 CPI are likely to print lower than the Bank's expectations. Today's announcement reinforces the case for rates remaining on hold in January. However, with the economy recovering - as evidenced by numerous confidence surveys - further rate hikes remain on the cards provided that the world economy remains reasonably robust and the NZD does not appreciate much more rapidly than forecast.

Darren Gibbs, Senior Economist, New Zealand (64) 9 351 1376

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