BusinessDesk: NZ pace of inflation probably slowed enough to keep central bank calm

By Jonathan Underhill

New Zealand's annual inflation probably slowed from a 21-year high in the third quarter, meeting Reserve Bank Governor Alan Bollard's estimate and giving him no reason to change his stance on keeping interest rates at a record low.

The consumer price index fell to 0.7% in the third quarter for an annual rate of 4.7%, according to a Reuters survey of 13 economists. That would be down from 1 percent and 5.3% respectively three months earlier.

The figures are due out on Tuesday. Two days later Bollard, who is also picking 0.7% inflation, is expected to keep the official cash rate at 2.50% 2.75%, highlighting the global risks while reiterating the potential for a future increase.

Since Bollard's last statement in September the 90-day bank bill rate has declined about 20 basis points to 2.75%. The Overnight Index Swap curve is showing traders betting there will be 41 basis points of hikes to the OCR in the next 12 months. That's up from the start of October when almost no increase was seen.

"The CPI print will provide useful information on when the RBNZ could possibly begin its tightening cycle," Philip Borkin, economist at Goldman Sachs & Partners, said in a note. "We expect a tightening bias to be retained but for the RBNZ to still be taking a cautious stance towards the timing of hikes.

The economy's tepid pace this year has confounded Bollard, with GDP growing just 0.1% in the second quarter compared to his 0.6% projection.

Companies including Fletcher Building have highlighted the delays in reconstruction work in Christchurch in the face of further earthquakes, which is pushing back the impetus to the whole economy and pressure on prices.

Fletcher, carpet maker Cavalier, tapware firm Methven, fast-food chain Restaurant Brands and pay-TV operator Sky Network Television have all warned of weaker-than-expected earnings and analysts fear more may be to come.

"We still see reconstruction work adding some 1.5% points to annual GDP growth over 2012 but the biggest contributions are more likely to be in late 2012 rather than mid-year," said Robin Clements, economist at UBS New Zealand. He lowered his GDP forecast for calendar 2012 to 3.2% from 3.7%.

The Treasury is also likely to project a more tepid track for GDP when it releases the Pre-election Economic and Fiscal Update on Tuesday, which will show a yawning budget deficit thanks to increased claims estimated by the EQC for the Canterbury quakes, of almost $18 billion, or 8.8% of GDP.

The kiwi dollar has proved resilient against the greenback. After tumbling through the second half of September it has since climbed back up above 80 U.S. cents. The trade-weighted index has also gained this month, though it is below 70.

The strong dollar will weigh on the cost of imported goods and their contribution to inflation, said ASB economists Nick Tuffley and Christina Leung, in a report.

"We expect the lagged effects of the NZ dollar strength will also flow through to lower tradable inflation over the coming year," they said. "As a result, annual headline inflation is likely to fall back to the middle of the RBNZ’s target band next year as the raft of government charges drop out of the annual rate."

The charges include the increase to goods and services tax to 15%.

In the September MPS, Bollard said global financial markets had deteriorated, with sovereign debt concerns in Europe and a weaker global outlook.

Since then European Union finance ministers have tried to find a way to limit losses from Greek debt for the region's lenders and Italy is among nations to have a credit-rating downgrade.

"Given an environment where it is difficult to have strong conviction over various global outcomes and it still being possible to imagine quite plausible adverse global economic scenarios, this is not the backdrop to begin a tightening cycle in our view," Goldman's Borkin said.

(BusinessDesk)