18 Jul 2016

Weak inflation strengthens case for interest rate cut

3:11 pm on 18 July 2016

The case for a further interest rate cut next month by the Reserve Bank (RBNZ) has been strengthened by another soft inflation number.

Reserve Bank of New Zealand

Photo: RNZ / Alexander Robertson

Official data from Statistics New Zealand showed the consumer price index rising 0.4 percent in the three months ended June, on the back of more expensive petrol and higher building costs, which offset cheaper meat and local airfares.

The annual inflation rate was also 0.4 percent, which was below financial market and RBNZ expectations.

"Today's softer than expected result reinforces the case for a 25 basis point reduction in the OCR [Official Cash Rate] in August," said Westpac acting chief economist Michael Gordon.

"Outside of the cost of building homes, there's little sign of inflation in the rest of the economy, and it's going to take longer to get back into the [central] bank's target band."

The RBNZ is required to anchor the annual inflation rate around the middle of a 1-3 percent target band, but it hasn't even been in the band for nearly two years and it's nearly five years since inflation was close to the desired midpoint.

The strength of the New Zealand dollar has been an important factor in low inflation because it has kept the price of imported goods and services low, dampening inflation.

Low inflation is common through most developed economies, driven by the slump in oil prices, weak economic activity following the global financial crisis, and a lack of wage pressures in most economies emerging from recession or struggling with weak growth.

The response of most central banks has been to cut interest rates in an attempt to stimulate consumer spending and thus prices.

The RBNZ will issue an updated assessment of the economy this week, which many analysts expect will try to "jawbone" the currency lower.

The chances of an interest rate cut by the RBNZ next month have risen after the latest data to about 80 percent, and Mr Gordon said a rate cut to 1.75 percent later in the year could not be discounted.

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