Inflation expected to stay low

"There is plenty of sense in the Reserve Bank holding the pause button for a while longer."

ASB chief economist Nick Tuffley

Economists expect annual inflation is still running lower than the Reserve Bank would like.

The data is due out today. ASB is expecting it to show an annual inflation rate of 1.8 per cent.

Westpac expects 1.9 per cent, while Infometrics expects 1.7 per cent and ANZ expects 1.4 per cent.

The Reserve Bank’s target is to keep inflation between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near a 2 per cent target midpoint.

ASB chief economist Nick Tuffley said the housing market and food prices would be the key drivers of inflation, with pressure soft elsewhere.

He said a low inflation backdrop would keep the prospect of an increase to the official cash rate on hold until early 2019, ‘‘and possibly beyond that’’.

‘‘We expect the CPI [consumer price index] to confirm that domestic inflation pressures remain subdued outside of one or two pockets and while the outlook for economic activity remains constructive and the beneficiary of a number of key supports, evidence of a firming in inflationary pressure is mixed at best.

‘‘In such an environment, and given a number of downside risks still lurking in the background, there is plenty of sense in the Reserve Bank holding the pause button for a while longer.’’

ANZ said oil price weakness would keep a lid on inflation, despite stronger local factors, such as rising grocery food prices.

Depending on the outcome of the recent political negotiations, there could be changes for the central bank on the horizon.

At the moment, inflation is the bank’s key consideration in setting interest rates.

NZ First had pledged to give the Reserve Bank a wider mandate, so that it was not only focused on inflation targets but other economic factors including the exchange rate. That is in line with the Labour Party’s view.

Infometrics chief forecaster Gareth Kiernan said he did not expect such a policy to change the inflation outlook much, were it enacted.

‘‘The Reserve Bank is likely to still view its primary role as aiming for inflation of 2 per cent per annum, with any other targets around employment, GDP and housing likely to play second fiddle,’’ he said.

‘‘It’s a bit like how asset prices were added in a few years ago as things that the bank has to take notice of when setting monetary policy … They take notice of them, but consider that the most positive contribution they can make with regards to those other variables is by ensuring price stability.’’