New Zealand Annual Inflation Rate Probably Accelerated to 3.5%
New Zealand's annual inflation rate probably accelerated in the first quarter, exceeding the top of the central bank's target band and adding to signs Governor Alan Bollard may delay cutting record-high interest rates until 2009.
The consumer prices index rose 3.5 percent in the year ended March 31 from 3.2 percent in December, according to the median estimate of 12 economists surveyed by Bloomberg News. Inflation in the quarter was probably 0.8 percent. The report will be released tomorrow at 10:45 a.m. in Wellington.
Bollard, who is required to keep annual price increases between 1 percent and 3 percent, said last month rising gasoline and food costs may keep inflation above his target until mid-2009. Nine of 12 economists surveyed by Bloomberg News expect he will keep the benchmark interest rate at 8.25 percent until at least Sept. 30. Five say rates will be unchanged until next year.
“Inflation is high and rising,'' said Doug Steel, senior economist at Westpac Banking Corp. in Wellington. “The cumulative inflationary pressure built up in the economy will prevent early interest-rate cuts despite a clear softening in the short-term economic growth outlook.''
Bollard on March 6 forecast prices will accelerate to 3.7 percent in the year ending Sept. 30, and won't drop below 3 percent until June 2009. He said borrowing costs needed to stay high “for a significant time yet'' to ensure inflation falls back toward the middle of his target range.
He expected consumer prices rose 0.7 percent in the first quarter after gaining 1.2 percent in the three months to December.
Slowing Economy
Bollard is under pressure from exporters and home-owners to cut interest rates as drought, international credit turmoil and a slump in the housing market weigh on consumer spending and threaten to stall economic growth.
Finance Minister Michael Cullen last month said he couldn't rule out the possibility of a recession this year. Consumer confidence fell to a 10-year low in the first quarter and business confidence was the weakest since 1975, two separate surveys showed bad credit payday loans. House sales in March plunged 53 percent to a seven-year low, the Real Estate Institute said on April 11.
Growth may slow to 1.7 percent this year from 3.1 percent in 2007, according to the median forecast of 12 economists surveyed by Bloomberg News.
Inflation pressures haven't dissipated even as growth slows. More than half of 972 companies surveyed by the New Zealand Institute of Economic Research Inc. expected to raise prices in the second quarter. Capacity utilization rose to a record, suggesting there are few spare resources in the economy, which further fans inflation.
`More Time'
Bollard can afford to wait and monitor inflation pressure in the economy before cutting rates in December, said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington.
“We need a bit more time to know pressures are subsiding as much as the growth outlook says they will,'' he said.
First-quarter inflation will be fanned by rising food and fuel prices, economists said.
Food prices are being buoyed by soaring world prices for meat and milk. Milk prices rose 4 percent in February form January, while beef gained 2.7 percent, according to government figures. Gasoline prices jumped 4 percent at the end of March from three months earlier, the Ministry of Economic Development reported.
Bollard will focus on non-tradable inflation, a core measure of prices that are not influenced by currency fluctuations and fuel, said Darren Gibbs, chief economist at Deutsche Bank AG in Auckland.
Non-Tradables Prices
The annual non-tradable inflation rate was probably 3.4 percent in the first quarter, slower than the 3.5 percent pace in the year to December, according to the median estimate of 10 economists.
Gibbs said there may have been a decline in inflation pressure in the housing sector as the market slows, which should be welcomed by the central bank.
Filed under: economics by Wolf