17 Oct 2016

Inflation picked to lift

10:29 am on 17 October 2016

Inflation is likely to have hit its low point and will pick up pace going into next year.

Various denominations of coins

Money Photo: 123RF

The consumer price index (CPI) for the three months to September 30 is expected to have been flat in a Reuters poll of economists, and the annual rate was forecast to be 0.1 percent.

Weak global oil prices, lower airfares, and a fall in ACC vehicle levies are expected to be offset by continued strength in building costs, house maintenance and rates.

First NZ Capital's director of economics Chris Green said the latest numbers were likely to be the trough of inflation in the current cycle.

But he said the Reserve Bank (RBNZ) would still follow through on its well-signalled intention to cut its official cash rate at least once more, most likely next month, to 1.75 percent.

"They've had a very strong signal, an explicit easing bias that they will cut, and it's odds-on we will see a further 25 basis point cut."

But with inflation likely to be back in the RBNZ's one to three percent target band for the first time in two years, the central bank will be less inclined to cut further, he said.

"The risks we'll see another cut in February are ebbing away - we have seen an easing in the currency as well and that will lessen the need for another cut."

The strength of the New Zealand dollar has been a factor in dampening imported inflation pressures.

However, the Kiwi has fallen more than 2 percent in the past month, and the prospect that the US Federal Reserve will raise rates in December is also working in the RBNZ's favour.

The RBNZ could be expected to sit on the sidelines and leave its cash rate on hold for an extended period, Mr Green said.

"The RBNZ will have the luxury of sitting on its hands and wait for other central banks to catch up to the rates they have, because while the RBNZ's rate is historically low, it's still well above many other banks, which are running low or even negative rates policies."

US Federal Reserve chair Janet Yellen said last week that her bank may need to take aggressive steps to lift the American economy and overcome the damage done by the global financial crisis.

In a speech, she said that might include high pressure policies to encourage investment and employment, and could see the Federal Reserve overshooting its own 2 percent inflation target.

Some analysts took the speech to suggest the Federal Reserve would not be aggressive in its monetary policy and future rate rises.

This would mean New Zealand interest rates staying significantly above those in the US, which would support the New Zealand dollar, and raise the risk the RBNZ might be forced to cut rates again.

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