BusinessDesk: NZ inflation data to show 2011 ended with tame consumer prices

By Jonathan Underhill

New Zealand inflation may have stayed relatively benign in the fourth quarter as a strong kiwi dollar provided a check on imported prices, while food prices weakened, giving the central bank little urgency to raise interest rates.

The Consumers Price Index held at 0.4 percent in the final three months of 2011, while the annual pace slowed to 2.6 percent from 4.6 percent, according to a Reuters survey, as the effect of the hike in goods and services tax in October 2010 rolls out of the numbers.

Fourth-quarter CPI figures are scheduled for release on Thursday, a week before the Reserve Bank releases its latest assessment of interest rates which is widely expected to signal no change from the record low 2.5 percent official cash rate and no sense of urgency for any hikes. Governor Alan Bollard cited the "unusual degree of uncertainty" to the global outlook and moderate demand at home when he kept rates unchanged last month.

"Inflation indicators suggest the RBNZ has breathing space on the inflation front," said Nick Tuffley, chief economist at ASB, in a note. "We expect it to remain on hold until the end of this year."

Tuffley expects food prices fell 2.2 percent in the fourth quarter, the biggest driver of tame tradable inflation. The monthly food prices series released by the government statistician show three months of decline in four. Fruit and vegetables have suffered a heightened seasonal decline.

Bollard's likely to have retained his concern about the global outlook, after Standard & Poor's cut France's AAA credit rating and downgraded Austria, Malta, Slovakia and Slovenia by one notch, and Italy, Portugal, Spain and Cyprus by two notches. That weakens the credit of a region pooling its resources to fight off the debt crisis which has driven up borrowing costs.

Some economists say Europe's economy will fall into recession this year, eroding global growth.

In New Zealand, companies surveyed last month thought inflation would slow in the coming year, according to National Bank's Business Outlook. As earnings season looms for the nation's listed companies, investors are betting heavyweights such as Fletcher Building will report profit at the low end of expectations.

"With business surveys showing a sharp drop in pricing intentions in recent months, inflation is likely to remain subdued in the near term," said Dominick Stephens, chief economist at Westpac, in a note.

Westpac is forecasting CPI was flat in the fourth quarter for an annual rate of 2.2 percent.

Stephens said that added to the impact of weaker food prices, the communications group would detract about 0.1 percentage points from the quarterly CPI, reflecting an increase in the standard data cap for broadband plans to 60 GB from 45 GB, amounting to a 25 percent drop in prices. A similar impact was recorded in the third quarter.

The trade-weighted index of the New Zealand dollar, the measure the central bank watches, dipped on Friday in New York to 70.71 but is up from as low as 66.35 in last November. Last month, the Reserve Bank forecast the TWI would average 68 in the fourth quarter last year and 67 in the first three months of 2012.

The central bank is in accord with market consensus on fourth-quarter inflation and is forecasting the same tepid 0.4 percent pace in the first quarter of this year.