Stable CPI gives Reserve Bank greater scope to cut rates

12.30pm

Stable consumer prices in the June quarter will give the Reserve Bank greater scope to cut interest rates and sooner, economists said today.

Statistics New Zealand said the Consumer Price Index was unchanged in the June quarter against economists' expectations of 0.4 per cent.

That brought the annual inflation rate down to its lowest level in three years -- 1.5 per cent against 2.5 per cent in the March quarter.

Economists universally expect Reserve Bank Governor Alan Bollard to cut the Official Cash Rate at the next review on July 24. But with inflation now near the bottom of the bank's 1-3 per cent target band, he can afford to immediately lop half a percentage point off the 5.25 per cent cash rate.

"With the inflation outlook favourable, the Reserve Bank has further scope to lower the official cash rate," said Lauren Rosborough, an economist at National Bank.

"It enhances the prospect of rate reductions but I wouldn't push that argument too far," said UBS chief economist Robin Clements.

"Undoubtedly this will fuel easing expectations but I wouldn't overplay it. One, it might be something specific...two, we're talking about a policy that's operated on the medium-term view, which is a three-year view. What happened to inflation last quarter I wouldn't say is irrelevant but it's not overly important," he added.

The 21 per cent rise of the New Zealand dollar against the US dollar in the 12 months to June did much to curb the price of petrol, cars and home appliances.

The neutral quarterly result follows a 0.4 per cent rise in the March 2003 quarter and a 0.6 per cent rise in the December 2002 quarter.

SNZ said the main downward contribution to today's figure came from transportation prices which fell by 2.6 per cent reflecting lower prices for petrol and used cars.

Housing prices have continued to rise, climbing by 1.3 per cent and making the biggest upward contribution to today's figure. Prices for the purchase of new dwellings rose by 1.8 per cent while and rents rose by 1 per cent in the June quarter.

Another upward contribution came from household operation prices, largely influenced by higher electricity prices. Electricity rose by 1.8 per cent in the June quarter.

Meanwhile, the Food Price Index decreased by 0.4 per cent in the June quarter.

The decrease was driven by a 6.4 per cent fall in prices for fruit and vegetables particularly fresh vegetables. Otherwise, restaurant meals and ready to eat foods rose by 0.3 per cent as did grocery food, soft drinks and confectionery prices. On an annual basis food prices rose by 0.6 per cent in the year to June.

- NZPA