{"id":122101,"date":"2021-04-21T18:05:46","date_gmt":"2021-04-21T18:05:46","guid":{"rendered":"https:\/\/precoinnews.com\/?p=122101"},"modified":"2021-04-21T18:05:46","modified_gmt":"2021-04-21T18:05:46","slug":"why-nz-interest-rates-will-not-follow-inflation-higher","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/why-nz-interest-rates-will-not-follow-inflation-higher\/","title":{"rendered":"Why NZ interest rates will not follow inflation higher"},"content":{"rendered":"
Inflation perked up in the March quarter and appears destined to breach the Reserve Bank’s target of 2 per cent by mid-year, but that doesn’t mean interest rates are going anywhere, any time soon.<\/p>\n
Higher<\/span> prices for transport and housing drove the consumers price index up by 0.8 per cent in the March quarter – in line with market expectations.<\/span><\/p>\n It compared with a 0.5 per cent increase in the December quarter, Stats NZ said.<\/p>\n The annual increase was 1.5 per cent, still a way off the Reserve Bank’s 2 per cent target, but economists say it won’t be long before inflation breaks higher.<\/p>\n Some are picking annual inflation will hit 2.5 per cent mid-year.<\/p>\n The question is how long will that spike last. For the moment, the view is that it won’t.<\/p>\n The Reserve Bank had forecast a quarterly gain over the March quarter of 1 per cent, so the inflation outcome endorses the central bank’s highly accommodative, “on hold” stance more than ever before, one market strategist said.<\/p>\n The bank targets annual inflation to be within a 1 to 3 per cent range, with a 2 per cent mid-point, and has maintained a very low 0.25 per cent official cash rate since March last year to try and soften the economic impact of Covid-19.<\/p>\n In its data release, Stats NZ said transport prices rose 3.9 per cent, the biggest quarterly rise in more than a decade.<\/p>\n Petrol prices rose 7.2 per cent, the biggest quarterly rise since June 2015.<\/p>\n Despite this, petrol prices are 3.8 per cent lower than they were a year ago, the department said.<\/p>\n Rent prices rose 1.0 per cent, the biggest quarterly increase in a year.<\/p>\n Capital Economics Ben Udy said “looking through the noise” of the data, inflation appeared subdued.<\/p>\n “Looking ahead, headline inflation will surge in Q2 as the weakness in prices last year becomes the base for the annual comparison.<\/p>\n “But we expect underlying inflation to remain close to the mid-point of the Reserve Bank’s 1-3 per cent target for the foreseeable future,” he said.<\/p>\n “That’s why we think the RBNZ will hike rates next year,” Udy said.<\/p>\n ANZ said inflation is currently being supported by a number of factors that are likely to prove temporary.<\/p>\n <\/p>\n Higher oil prices and supply-chain disruptions have pushed up goods import prices and shipping costs, while the lack of migrant workers has led to higher-than-otherwise labour costs in some areas, the bank said.<\/p>\n “This is likely to see inflation break above 2 per cent over mid-2021, but we expect inflation pressures to ease once these drivers fade.”<\/p>\n It was always going to be a high hurdle for today’s data to shift the Reserve Bank from their ‘watch, worry and wait’ stance, ANZ said.<\/p>\n Details of this release were unlikely to challenge the central bank’s view that ongoing stimulatory monetary policy settings will be needed to generate a sustained return to 2 per cent CPI inflation, it said.<\/p>\n Kiwibank chief economist Jarrod Kerr expected annual headline inflation to overshoot the Reserve Bank’s 2 per cent target midpoint, temporarily.<\/p>\n “Annual figures in the next (June) quarter will be especially strong due to base effects of a weak quarter last year when prices fell. Inflation could spike to 2.5 per cent.<\/p>\n But the coming acceleration in inflation should prove temporary,” Kerr said.<\/p>\n “Bottlenecks at our ports will eventually be addressed. Strip away the volatility and core inflation remains subdued,” Kerr said.<\/p>\n “The economy is not yet strong enough to generate a sustained lift in prices. There’s still some spare capacity out there. When setting monetary policy, the Reserve Bank should look through the rise, just like every other central bank.”<\/p>\n Westpac senior economist Satish Ranchhod also expects annual inflation to push higher, mid year.<\/p>\n Global production levels have been ramping up in recent months, and the disruptions to local and international distribution networks will eventually clear, Ranchhod said.<\/p>\n He said the reinforced Westpac’s view that the official cash rate would remain on hold “for an extended period”.<\/p>\n