UPDATE: Absence of inflation in NZ gives scope for more cuts

UPDATE: Absence of domestic inflation in NZ provides scope for more rate cuts

(Recasts and updates with economist comment)

By Paul McBeth

Oct. 16 (BusinessDesk) - Domestic, or non-tradables, inflation, stalled in the third quarter, and is expected to remain subdued, leaving the door open for further interest rates cuts by the Reserve Bank.

The consumers price index increased 0.3 percent in the three months ended Sept. 30, meeting the Reserve Bank's forecast last month, and slowing from a pace of 0.4 percent in the June quarter, Statistics New Zealand said. The annual pace of inflation was unchanged at 0.4 percent, slightly ahead of the central bank's forecast and economist expectations.

Non-tradables inflation, which covers domestic goods and services, was zero in the quarter, after rising 0.1 percent in June, and the lowest level since March 2001. The annual pace of non-tradables inflation slowed to 1.5 percent from 2 percent, its smallest increase since December 2001.

Last month, the Reserve Bank said it expected non-tradables inflation to fall in the near-term to "historically low levels" reflecting one-off factors such as a cut in Accident Compensation Corp car levies, and falling below 1.5 percent on an annual basis in late 2015. The bank expected low interest rates and a depreciating kiwi dollar to stoke a revival domestic demand next year, helping lift the measure of domestic inflation to 2 percent in 2018, still below the historical average.

ASB Bank senior economist Jane Turner said the non-tradables figure was in line with the Reserve Bank's expectations, which was prepared for the ACC levy reduction, which drove a 24 percent drop in the price of private transport services, and increased general practitioner subsidies that contributed to a 2.6 percent decline in the price of out-patient medical services.

Prices for newly built housing rose 1.6 percent, and were up 5.5 percent on the year, a trend which Turner said would continue to provide upward price pressure with elevated building activity in Canterbury and Auckland set to push up construction costs.

"What is concerning is the underlying trend in non-tradables inflation has slowed considerably over 2015, and this is the component that the Reserve Bank is supposed to have more influence on," Turner said. "Looking ahead, we are expecting growth to slow over the next year, and we don't see what's going to pick up that core non-tradables inflation pressure without further stimulus."

ASB expects RBNZ governor Graeme Wheeler will hold off cutting the 2.5 percent official cash rate at the Oct. 29 review, but still anticipates a reduction at the full December monetary policy statement.

Turner said ASB sees more downside risks to the local inflation outlook over the next two years than the Reserve Bank which might put pressure on Wheeler to cut rates further.

"Clearly the Reserve Bank of New Zealand is still worried about having some ammo saved up if the global outlook deteriorates," she said.

Annual inflation hasn't been within the central bank's 1 percent-to-3 percent target range since the third quarter of last year, when it scraped in at 1 percent, as a strong kiwi dollar, cheap oil and low interest rates kept a lid on consumer prices. Wheeler this week said more rate cuts were likely, depending on the emerging flow of data, although he's also wary of stoking demand in the housing market by contributing to cheaper borrowing costs.

Non-tradables inflation has replaced the tradables component, which measures price movements for goods and services that do face international competition, in weighing on consumer prices after a sharp drop in the kiwi dollar through the middle of this year.

Tradables inflation rose 0.7 percent in the quarter, slowing from a 0.9 percent rate three months earlier. On an annual basis, prices for tradable goods fell 1.2 percent, compared to a 1.8 percent decline in the June year.

(BusinessDesk)

© Scoop Media