Interest rates are sure to rise next week but falling
dairy prices and the continually high New Zealand dollar may
cause the Reserve Bank to rethink its strategy to curb
Statistic New Zealand's consumer price index, the official
measure of inflation, was lower than expected in both the
March quarter and year ended March.
In the quarter, inflation was only 0.3%, below market
forecasts of 0.5%. Annual inflation was 1.5%, below market
forecasts of 1.7% and the December annual rate of 1.6%.
''We see an April official cash rate increase as almost
certain and it has been fully priced by markets,'' ASB
economist Christina Leung said.
''We expect the Reserve Bank will hike in April and then wait
until July before following up.''
However, the risk of the central bank lifting the OCR in
June, rather than the ASB forecast of July, was high given
market pricing was about 80% of the way there.
Factors such as the swift weakening of dairy prices and the
stubbornly-high New Zealand dollar were reasons for the
Reserve Bank to be cautious, she said.
The main inference from the CPI was tradeable inflation
remaining surprisingly contained. Despite rising spending and
consumer confidence, retailers were struggling to pass on
further price increases.
There were no other material implications from the release
for further inflation pressures, Ms Leung said.
Looking to the detail of the CPI, Ms Leung said the 0.7% fall
in tradeable inflation reflected discounting across a range
of imported household items, including clothing and footwear,
as well as furniture and appliances.
''These results suggest retailers continue to face
competitive pricing pressures, despite the improvement in
household demand and the recent tick-up in pricing intentions
in business surveys.''
The 1.1% increase in non-tradeable inflation was slightly
softer than expected, she said.
It largely reflected weaker-than-expected alcohol and tobacco
prices in the quarter, despite the ''substantial''
contribution from the 10% increase in tobacco-excise tax that
came through every March quarter.
The improvement in housing-related costs was in line with
expectations. Construction costs rose 1.2% and rents
increased 0.6% over the quarter.
The Reserve Bank releases its next OCR statement on April 24.