Tame NZ inflation expectations may still be too high: RBNZ

Tame NZ inflation expectations may still be too high, RBNZ says

By Paul McBeth

Dec. 11 (BusinessDesk) - Tame expectations for increases in New Zealand consumer price increases could still be too high, and the Reserve Bank is reviewing the way it assesses non-tradable inflation, which has undershot its estimates.

The consumers price index rose at an annual pace of 1 percent in the September quarter, undershooting the Reserve Bank's forecast for a 1.3 percent pace, and the bank today trimmed back its expectations for inflation in the coming year, projecting a gradual rise to 2 percent in late 2016.

Reserve Bank research suggests tradables inflation, which accounts for those goods and service that compete with imported rivals, has tracked historical relationships with a strong exchange rate and falling global oil and food prices keeping a lid on that sector, it said in today's December monetary policy statement. What has been problematic is that non-tradables inflation, which doesn't compete with international goods and services, has been lower than expected.

As a result, the Reserve Bank is reviewing the indicators and models it uses to predict the output gap, and is also looking at the dynamic between inflation expectations and pricing behaviour. The risk is that some inflation expectations aren't being captured and that CPI and output gap estimates may be too high, and work into the "unusually low" pace is continuing, the bank said.

"Non-tradables inflation is expected to remain weak and increase only gradually over the projection," the bank said. "Recent unexplained weakness when compared with capacity pressures and inflation expectations is assumed to dissipate only gradually."

Companies have wound back their inflation expectations, based on the Reserve Bank's survey of expectations released on Nov. 25. Firms see the consumers price index rising an annual 1.59 percent in the year ahead, down from the 1.96 percent pace they predicted three months ago. Two-year inflation expectations fell to 2.06 percent from 2.23 percent.

Non-tradables inflation slowed to an annual pace of 2.5 percent in the September quarter from 3 percent in the March period.

Excess labour supply is also acting as a weight on inflation, though jobs growth in the coming years is expected to eventually feed through to wage increases and push up consumer prices.

The bank is able to look through some of the shocks to tradables inflation that are coming from the strong currency and slumping oil prices, both of which it sees as risks to its short-term outlook for headline CPI.

It also anticipates slower house price inflation to persist as higher interest rates and restrictions on low-equity home lending continue to drag on the property market.

(BusinessDesk)

© Scoop Media