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June quarter inflation higher than expected (Corrected)
July 15th, 2008
Higher petrol and food costs helped drive annual inflation up to an 8 year high of 4.0% in the June quarter, beating market expectations for a 3.8% rise and making an official interest rate cut next Thursday less likely. Annual food price inflation jumped to 8.2% in June from a year ago while transport prices rose 4.9%.
The news of a 1.6% rise in prices in the June quarter from the March quarter was also above economist expectations for a 1.4% rise and puts the inflation heat on the Reserve Bank of New Zealand, which is supposed to keep inflation between 1-3% over the medium term.
Before these latest figures, economists and the market had seen a reasonable chance that the RBNZ would cut the Official Cash Rate (OCR) from 8.25% to 8% next Thursday when it releases its latest decision on the OCR. The higher than expected number is likely to reduce the chances of a rate cut next Thursday.
Quarterly inflation more than doubled in the June quarter to 1.6% from 0.7% in the March quarter. This was the highest quarterly inflation since the June quarter of 2008.
Annual non-tradeables inflation (domestic inflation not linked to international prices) edged down only slightly to 3.4% from 3.5%, while quarterly non-tradeables inflation fell to 0.9% from 1.1%.
Tradeables inflation of 2.3% in the quarter equalled a June 2006 surge and the 4.8% tradeables inflation from the same quarter a year ago was the highest since the Reserve Bank started collecting the records in 1996.
Inflation was higher than the Reserve Bank’s June 6 Monetary Policy Statement forecasts for 3.8% inflation overall, with tradeables inflation forecast at 4.6% and non-tradeables inflation at 3.4%.
This says that overall inflationary pressures are not slowing as fast as the Reserve Bank had hoped, meaning a rate cut next Thursday is less likely.
Although domestic inflationary pressures are in line with Reserve Bank forecasts. (This corrects from an earlier version which said non-tradeables inflation was above the RBNZ forecast).
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July 15th, 2008 at 11:17 am
Hike the interest rates now before it’s too late. Pop the housing bubble with an interest rate spike. That should get the market stabilised just in time for all those first home buyers who’ve registered in kiwisaver who’ll be eligible for the home deposit subidy from July 2010. (By then hopefully the interest rate would have been slashed).
July 15th, 2008 at 11:17 am
Yep, inflation 33% above upper target band, can’t imagine they can cut in July now (well one hopes not). Makes the forecast of 4.7% in next quarter rather unlikely as well – I think that quarter’s figure will feature the number 5. NZ$ lost about a third of a cent on the news – did the Forex markets expect even worse inflation figures? Well done to the Westpac folks who picked 4%……….
July 15th, 2008 at 11:18 am
Bernard – is the non tradeables figure tucked away in this info, I can’t see it?
July 15th, 2008 at 11:34 am
Andy,
Just updated in the story. Building as I go.
Non tradeables was 0.9% for the quarter and 3.4% for the year. The RBNZ had expected 3.4% for the year for non-tradeables (not 3.1% as said earlier).
I (still) can’t see a rate cut on Thursday.
cheers
Bernard
July 15th, 2008 at 12:17 pm
I am a critic of the use of interest rates by the banking system to control price rises regardless of the cause of the price rises. Surely you treat a symptom by tackling the cause. How do the flow-on effects of the huge rises in the international prices of oil on so many of our economic activities, get tackled by raising our money-hire rates to the point of choking the life out of our internal economy? This also leads to our primary producers and manufacturers getting squeezed by the resulting high dollar. So what if it means we can all have a TV in every room and ten pairs of shoes !!
If the magic figure that the reserve bank bases it’s wholesale money-hire rates upon is 1-3% (under rule of 70 means our dollar halves in value every 70 to 23 years), then how much of that inflation figure is attributable to imported fuel inflation, and why should that not be left out of their calculations, so that our internal economy is not artificially choked. After all, the money we hire is not just used to buy houses, it makes our world go round.
July 15th, 2008 at 12:28 pm
JB,
I’m not sure where you’ve been but the housing bubble has been well and truly burst. What we will see shortly is the fall out from that. The price rises for food, energy and other commodities are no longer related to demand but to other factors (such as oil being used as a hedge against the falling $).
This month we finally saw new car sales plummet. In the last month 2 of the major developers in Christchurch have gone into reverse. Slowly the fallout is spreading. People everywhere are tightening the belts and preparing to hunker down.
This is absolutely not the time to be raising rates in NZ. One could argue that rates shouldn’t be cut aggressively and even then that it may not make a huge difference to mortgage rates but really the bottom has fallen out of the economy at the same time necessities are still rising in price.
The RB has completely mismanaged the economy in recent years but that’s no excuse for compounding the disaster.
July 15th, 2008 at 12:41 pm
Many of our home grown economists seem to be talking their own book up and persisting with pleas for cuts asap (the BNZ mob are at it). One has to go to Aussie to seemingly get a sensible assessment (the shame of it):
Matthew Johnson, an economist at ICAP Australia Ltd. in Sydney. “It’s a tough situation for the central bank to be in. If they cut in the face of accelerating inflation, they are risking a policy error, which could be very expensive in the long run.’
Bloomberg
July 15th, 2008 at 2:02 pm
The Reserve Bank might see the June Inflation value as the peak they were waiting for to allow them to begin lowering the OCR.
July 15th, 2008 at 2:09 pm
Here, in my opinion, is the part of the analysis that really matters;
“The 26 percent rise in petrol prices over the year was the most significant contributor to CPI’s rise. Excluding this, the CPI would have risen by 2.7 percent.”
http://www.stuff.co.nz/4619155a13.html
In other words, Bollard can’t do diddley squat about that – what’s been within his control, he’s controlled.
Time for a rate cut.
July 15th, 2008 at 2:17 pm
“This says that overall inflationary pressures are not slowing as fast as the Reserve Bank had hoped, meaning a rate cut next Thursday is less likely.”
This is a bit misleading, given that the RBNZ is more concerned with inflation it can do something about (i.e. non-tradable inflation) than with “overall” inflation which includes factors beyond its control. The RBNZ could in fact be cheered by the fact that non-tradable inflation came in at 0.1% below their prediction and that there also appears to be a downward trend for this component (blue line in chart above). Also significant is that although tradable inflation continues to trend sharply upward, non-tradable inflation still decreased, indicating, for the moment at least, the absence of flow-on effects. So the data could be interpreted to mean that a rate cut next Thursday is if anything slightly more likely. Certainly the market (pricing in about a 60% chance of a rate cut next week) appears to think so with the NZD dropping slightly after the data release.
July 15th, 2008 at 2:31 pm
“In other words, Bollard can’t do diddley squat about that – what’s been within his control, he’s controlled.”
Not completely true. If higher interest rates increase the exchange rate then they do decrease the price of tradable goods.
“Also significant is that although tradable inflation continues to trend sharply upward, non-tradable inflation still decreased, indicating, for the moment at least, the absence of flow-on effects”
Behind the slowing growth in non-tradables in June was a weak rental result – most building analysts of talked to believe that the fall in rents in June was an aberration – implying that we will see some payback in September.
Furthermore, the annual growth in non-tradables is being biased down by the subsidies in health and education that were introduced in September. Once these fall out the rate of non-tradable inflation will be pushing 4% again – hardly a good position to be in.
However, I completely buy your point that, given that the Bank had already taken account of these factors, the fact that non-tradable inflation was 0.1 percentage points below their forecasts will have increased the chance of a rate cut – although I don’t think they can completely look-through the fact that the headline number was greater than they expected.
July 15th, 2008 at 2:32 pm
From what I understand the reserve bank governor can ignore global inflationary shocks when dealing with inflation. The argument is whether the increase in oil is just a shock based on speculation or a serious demand/supply issue.
Bollard has speculated that oil will drop soon (page 5, June Monetary Policy Statement) and is therefore expecting to cut rates. I don’t think oil is going to go down in the med term at all.
Cutting interest rates might make alot of people happy now, but un-manageable high inflation will make everyone unhappy for quite some time. Eg; having to negotiate monthly wage increases just to keep up with inflation.
July 15th, 2008 at 2:33 pm
Neil
Many thanks. My reading of the data in the June 6 MPS forecasts from the RBNZ was that it forecast 3.4% non tradeables inflation for the June quarter from a year ago. So that’s in line for non-tradeables with the actual.
My reading of the forex activity after the CPI is that it initially fell, but has since risen to 76.40 cents from 76.20 shortly after the CPI.
I still think the overall number is worse than expectations. The RBNZ can most directly affect non tradeables inflation, but inflationary expectations figures (NZIER and National Bank survey) show inflationary expectations at record levels. I reckon the RBNZ still has an inflation problem and can’t afford to cut now.
cheers
Bernard
July 15th, 2008 at 2:34 pm
Dave – the bank in its own analysis said they didn’t expect a peak till the THIRD quarter, so they are hardly likely to see the SECOND quarter figure as a peak. They predicted a 3Q peak of 4.7% but that is based on the bizarre assumption that oil would go back to $100 or so. A figure in excess of 5% now looks on the cards for Q3 (especially with oil at >$150 off the back of a few GoM hurricanes – its that time of year).
Kate – since the price of petrol flows out into every aspect of the economy (as it goes up so does the cost of moving goods, producing food, mining, forestry etc, absolutely everything, which then tends to get embedded in the domestic side of inflation) trying to claim its of no significance is the height of folly. The petrol price rises that took place in the 2Q will now be embedding themselves in inflationary rises in all other aspects of the economy as we speak.
July 15th, 2008 at 2:54 pm
The other wacko thing about all this is that if interest rates are cut the NZ dollar weakens against the US which increases the cost of petrol in NZ.
July 15th, 2008 at 3:53 pm
One approach for the RBNZ to take is to just stand pat until the inflation numbers really show that they have peaked and then cut rates by 50 to 100bps. A 25bp cut now in the face of these numbers and a period of uncertainty about oil prices will not make a huge difference.
They have indicated they want to cut and its just a question of the appropriate time.
July 15th, 2008 at 4:47 pm
The RBNZ will more than likely wait for the labour market stats out early August before cutting in September. A significant decrease in employment/increase in unemployment (very likely) will greatly reduce the risk of wage inflation which will be their main focus going forward. They will want to cut in small increments thereafter (to ensure orderly decline of NZD) but if the economy continues to deteriorate so rapidly or some destabilising off-shore event (numerous possibilities) occurs…
July 15th, 2008 at 4:50 pm
Will a cut actually lower the interest rates people are paying. In the Uk interest rates on housing are up around 8%depending on your equity. while they have much lower offical interest rates. Can you drop the cost of money in a credit crisis?
July 15th, 2008 at 6:20 pm
Andy – The RB keep a record of their unsuccessful MPS forecasts on their web site.
July 15th, 2008 at 6:59 pm
Any further delay in getting the rate cutting process started would be utter folly. The only kind of “flation” Bollard should be concerned about begins with a “de”, not an “in”. The recession has barely begun, yet we still have a mainstream of naysayers pretending this is some kind of temporary slowdown.
July 15th, 2008 at 7:24 pm
Andrew
we have just remortgaged at 6.25% (having gone for a slightly more expensive long term fix as we expect interest rates to rise in the medium to long term here). The 8% you quote is for first time buyers or existing low/no equity owners that cannot raise a 20-25% deposit. Less than 12 months ago those punters didn’t need any deposit and could secure 4.5% mortgages. Most lenders will not even consider writing this business while they are trying to shore up balance sheets. The crunch has effectively squeezed a huge proportion of first time buyers, highly leveraged buy to let landlords and low/no equity owners out of the market. Housing associations are hovering up the fallout and securing some real bargins. Rents have risen 8% over the last year and show no sign of abating as there is still a huge housing shortage especially in the home counties and London. There is a major correction going on and the young seem to be the ones paying for it in one way or another, which is the real tragedy of this situation. The rest of us are just sitting on paper losses (and as due punishment our kids probably wont/cant leave home until they are 40 – groan!!!).
July 15th, 2008 at 9:47 pm
Same problem, same answer;
Mortgages are one of what is referred to in banking circles as “powered” money, that is a term that basically covers all “created Credit”, which is simply the credit that banks create out of fresh air then loan out at interest. All mortgages, worldwide, have for a long, long time been nothing but entries in the loan book, the paper money, or these days, digital bits, issued to the lender which they then spend into circulation in the building of the only thing in the deal of true value, the house, now here’s the trick, the lender then has to set about finding a means in the “real sector” repaying 3x over, due to interest/tribute, the bogus loan he/or she has been encumbered with and if they can’t keep up the payments, the banks get to keep what they had managed to pay plus the house, all for nothing, nice work if your born in the right circles.
Here is another trick, most money once in circulation ends up deposited back in a bank, who then have the ability under what are known as Fractional Prudential Reserve Requirement Regulations to then keep all new deposits as reserves, then loan out ten times or more “created credit” than they have backing for.
This simple, yet absurd process is basically the house of cards, along with a stock market rigged by way of voting structures and inside information, the entire worlds financial sector is based on, it inevitably leads to the slave minded aristocrats at the centre of it repeatedly coming up with obscene means and methods to create as much of a need for their counterfeit currency as they can, this repeatedly leads them to loaning more of their counterfeit currency than the real sector has the physical means to collectively repay, which sees the indebted citizens and businesses turn on each other because they are trying to achieve the impossible and deplete the worlds resources at lightening speed.
Bernard says our banks are safer, the truth is our banks operate under what is referred to as “generally accepted worldwide best practice”. all banking regulation is overseen by the Bank Of International Settlements and its NZ subsidiaries- NZ Bankers Association, Treasury, RBNZ NZDMO all deposit taking institutes in NZ, including insurance companies, all operate under the Fractional Prudential Reserve regulations, the reason most of the non bank deposit takers have gone bust is that they expanded their deposits 10x as “created credit” then loaned them out at interest as varied length loans, it was when the overall economy began to stall due to the inflation that the over supply of created credit had caused, and corporations moved our jobs to slave labour, that more than 10% of people wanted their money back all at once than they had immediate reserves to cover, thus the “game” was up.
Why don’t the registered banks go the same way you ask, that’s were another cunning trick comes into play, the central banks offer/demand of the Government of the nation of who’s banking system is purposely brought to failure, they offer them a further debt facility, which they accept, or suffer financial chaos as there monetary system falls apart as the banks are exposed for the hoax they currently are, this facility involves us taking more of their counterfeit currency, at interest, to be funnelled to the banks to keep them solvent, now heres the trick, these loans are to be paid back out of the future taxes of the nation as contracted by Government Bonds or Treasury Bills. You soon begin to get the picture of just how much of the average punters income and taxes are going to service the bogus loans of the multilayered pyramid scam that is the international banking system.
I seem to be once again having a terrible trouble getting posts up with links in, so if you remain not entirely convinced just Google – money as debt, debt creation, central banks, monetary reform, fractional prudential reserve, debt based monetary system, social credit.
DECIDE FOR YOURSELF
I would not be alarming anyone by divulging this in such plain terms, if it were not for the fact that the solutions are now readily available.
Cheers
July 16th, 2008 at 11:36 am
It’s good to hear your reality check, what are the “readily available solutions” to the ‘money go round’? After all, the fractional reserve system you mention has been painstakingly evolved from the time of the goldsmiths and their ‘IOU’ banknotes which were a genius derivative debt instrument, along with the concept of compound interest (eighth wonder of the world). The banking fraternity are not going to relinquish their monopoly on the creation of money without a fight, and the odd historical political ‘manipulation’, yes?
July 16th, 2008 at 1:08 pm
I would guess mortgage rates will drop soon and keep dropping along with the currency.it can all happen pretty fast.last time floating rates dropped from 11.5% to about 7% in a space of two years and our dollar was worth 40c US.that was good news for yanks and germans who came here and bought all the best motels at the beach and the like.so that would be the bottom and we would bump along there for a couple of years and then haul ourselves up and then start the boom again.