Tame inflation may show high dollar is doing Bollard's work

Westpac chief economist Brendan O'Donovan. Photo / Mark Mitchell

New Zealand probably recorded the tamest inflation in a decade in the third quarter, helped by a tepid economy and a rapidly appreciating currency.

The Consumer Price Index accelerated to a quarterly rate of 1 per cent in the three months ended September 30 while the annual rate slowed to 1.5 per cent, according to a Reuters survey. The figures are scheduled for release on Monday.

The latest inflation reading excludes this month's GST increase to 15 per cent and reflects an economy where consumers are paying debt rather than spending and the manufacturing sector is in contraction.

Added to that, the kiwi dollar advanced 7.3 per cent against the greenback in the third quarter, ensuring there was little inflationary impact from imports.

"There is not a great deal going on inflation-wise," said Brendan O'Donovan, chief economist at Westpac, in a report.

"Prices for tradable goods and services have been especially subdued, thanks to the massive appreciation of the exchange rate over the past year or so."

The Reserve Bank is projecting an even milder track for inflation, at 0.9 per cent in the quarter for an annual 1.4 per cent. On that basis there is little impetus for the Reserve Bank to lift the official cash rate from 3 per cent any time soon.

CPI kicks up starting in the fourth quarter, according to the RBNZ's forecast track, taking in the GST increase to break through the top of the 1 per cent-to-3 per cent band the bank targets. It accelerates to almost 5 per cent by June next year, according to the RBNZ's policy statement last month.

Governor Alan Bollard has said the one-time effects of GST, which is countered by a decrease in personal and company tax, probably won't feed through into broader inflationary pressures. But the central bank is concerned that expectations may build for higher prices in an economy facing the effects of ETS costs, ACC levies and higher excise tax.

If CPI reaches 5 per cent it "runs the risk of spilling over to generalised inflation," said Christina Leung, an economist at ASB, in a report. "We expect the RBNZ will become less sanguine about inflation pressures in the NZ economy over the coming year."

Westpac forecasts tradables annual inflation fell 0.3 per cent while non-tradables - goods and services produced and consumed locally - climbed 2.3 per cent.

Non-tradables will likely reflect various government charges.

And ASB's Leung said there's also evidence landlords are attempting to raise rents, possibly to make up for the loss of tax breaks on depreciation.

Added to that, reconstruction in Canterbury is likely to hoover up much of the slack in the building industry that's been associated with the downturn in the property market, she said.

Bollard next reviews interest rates on October 29 and December 9 but some economists say he now won't move until 2011.