Roger J Kerr says the RBNZ should not lower its inflation outlook as has been done across the Tasman because price rises are coming here

Roger J Kerr says the RBNZ should not lower its inflation outlook as has been done across the Tasman because price rises are coming here

By Roger J Kerr

Across the ditch the Aussies have downgraded their inflation forecasts substantially with lower energy costs, wage increases very moderate, no increase in constructions costs and the lower AUD last year already played through in terms of imported goods.

Whilst the RBNZ could learn something from the RBA in respect to reading the FX markets and making ambushes with OCR cuts very effective, they should not follow the RBA with a lower inflation outlook for 2016.

Constructions costs continue to increase sharply in the NZ marketplace with supply side resources really struggling to keep up with the hot demand.

Remove the impact of lower oil prices last year from the inflation picture and you have some serious price increases occurring across the economy.

Over the last 12 months lower petrol prices have disguised other price increases and distorted annual inflation figures. 

We are now not too far away from seeing retail petrol prices and air-fares increasing from the lift in crude oil prices from US$30/barrel in January to US$44/barrel today (a 47% increase!).

Despite the higher inflation arguments, the RBNZ is still likely to cut the OCR again on June 9th because the dairy industry is on the brink of a crisis and they need to drive the NZ dollar downwards.

We will see if the RBNZ Financial Stability report that comes out before then will hint at further macro-prudential regulations on the banks to contain the housing market whilst interest rates need to be lowered for currency reasons.

Last Friday’s weaker than expected jobs numbers in the US would on the surface encourage the Federal Reserve to go even slower on US interest rate increases.

The Federal Reserve will be well aware that there is something screwy in US GDP growth numbers since the 2009 GFC that produces very weak March results each year and a strong bounce back in activity levels in the June quarter i.e. do not read too much into the recent weaker US economic indicators.

The US interest rate markets are only pricing–in a 50% probability of a 0.25% rate hike this year, however those odds will change as the economic activity indicators rebound.


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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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7 Comments

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It could be a quiet day for you in here Roger....all the other readers have got Panama fever!!

The next step in our economy will likely see the FHB and their kiwisaver potion being lifted from the $400K threshold to $450K when buying a house.......and........the trouble is all houses lift in value even though nothing about the houses have changed......other parts of the economy then have to adjust to counter the weight. Wheeler gets left with one leg riding high jockey style while the other leg is bareback......no matter how you dress it up the bit he's sitting on looks like a zero!

As much as I have been hoping for this, the minister seemed a bit lukewarm on increasing them (as quoted here: http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obje...). Apparently it is part of the government's strategy to get construction companies producing cheap houses. To be clear, he didn't rule it out, but the way he was quoted in the article made me think an increase was not going to happen in the near future. What would I know though - next year is election year after all...

Keep looking ..... For soon coming inflation ..... Any time soon.
Meanwhile measured inflation CPI will stay on zero, or .2 etc.
Interest rates will keep dropping also.

I agree that the RB will drop interest rates once more - I don't think that New Zealand will get the zero or negative interest rates that some on this site have been wishing for. To lower the exchange rate seems more dependant in the recent past on what happens in Australia rather than what happens in New Zealand. It appears that US and European economies - while still fragile are - are doing better than one might expect. I don't have any idea what is going to happen in the next few years but I suspect a fair few people have been assuming that what has been happening overseas will happen here and there I think they are wrong.

@BadRobot...i think that you are over thinking it. The US are 19 TRILLION in debt, Europe has negative interest rates, Japan are over 200% debt to GDP...how are these economies doing better than one might expect...any rational person would say they are bankrupt wouldn't they...? Even though you say you have no idea what is going to happen in the future you're happy to say it can't happen here...I bet you never thought the OCR would ever be 2.25% with most commentators predicting 2 more cuts by the end of the year and it being under 2%...Oh and how about negative rates never done before totally experimental...and if you ask me fraudulent...

You are looking at things as if New Zealand has the same problems as the rest of the world. We don't. The US is showing an improvement in job growth and wages are rising. European GDP growth rate was higher than was expected. I did say they were still fragile - but what I am trying to say is that they may be coming out the other side. You seem to be not thinking at all or perhaps you just don't think enough. No one can predict the future but to assume that just because zero or negative interest rates have happened in the rest of the world does not mean it will happen here. What is the justification for cutting interest rates - what problem are you trying to solve . Sometimes I think is is just envy at other country's with their lower interest rates or have you got yourself in a hole which you think lower interest rates will solve.

Just last week,Roger was urging the Reserve Bank to cut rates,to assist the dairy industry. Now he back to his previous mantra,that much higher inflation is about to come crashing down on us.But I notice that he never attempts to put a figure on it.
Come on Roger. It's been about 5 years since inflation last hit the mid target point of 2%,so when will it hit that figure again? Should interest rates be rising,to counter the higher inflation that you keep expecting and just how high might it go?