15 Jul 2013

Inflation predicted below RBNZ target

7:28 am on 15 July 2013

The annual inflation rate is expected to be below the Reserve Bank's target range in the 12 months ended June, for the fourth quarter in a row.

A Reuters poll of economists has flagged the consumer price index (CPI), published on Tuesday, to have risen 0.8%.

Westpac Bank is forecasting the CPI to have risen just 0.7% in the year, less than the central bank's 0.8% forecast and down from the 0.9% annual increase recorded in March.

However Westpac economist Michael Gordon says this is probably the last quarter in which the inflation rate undershoots the Reserve Bank's 1 - 3% target range.

He says if Westpac is correct in forecasting a CPI increase of 0.7% in the year it will be the slowest rate of inflation for this cycle and even the lowest rate since 1999.

"The Reserve Bank's target is specified in terms of a medium term average so it's not strictly a breach of their target, but it is somewhat uncomfortable to explain and the longer it does go below their target the more discomfort it can lead to."

Mr Gordon says the key will be what happens with the New Zealand exchange rate and to date the high New Zealand dollar has done a lot to depress prices of internationally traded goods.