Falling prices hold inflation below 1pc
Annual inflation remains close to 13-year lows at just 0.9 per cent for the year to December, with falling prices in the last three months of 2012, in part due to a high New Zealand dollar.
Low inflation continued to point to official interest rates remaining on hold, probably until 2014, bank economists said.
The 0.2 per cent fall in inflation in the December quarter, announced yesterday, saw the kiwi knocked back sharply, by almost a cent initially, to close about US83.5c late yesterday.
It was the first time since 1960 that annual inflation was under 1 per cent for two quarters. New Zealand last suffered from annual deflation, or generally falling prices, during the Great Depression of the 1930s.
The Employers and Manufacturers Association said the Reserve Bank should cut official inter- est rates, with inflation below its target zone again and the ‘‘spectre’’ of deflation.
The central bank is due to make its next announcement on official interest rates on January 31, in less than a fortnight.
EMA chief executive Kim Campbell said lowering the cash rate would help New Zealand keep in line with rate cuts in Australia, the country’s biggest trade partner. This would help to keep the trans-Tasman exchange rate at its present favourable level of about A79c, he said.
A lower cash rate would keep inflation within the target range and make investment in productive enterprise more attractive, because interest costs were a handbrake on investment, Campbell said.
‘‘If we’re lucky, it might also help bring our exchange rate down marginally.’’
But bank economists still think the Reserve Bank will keep interest rates on hold, because inflation is tipped to head back up in the coming year because of the Canterbury rebuild, healthy and rising business and consumer confidence, and rising asset prices, including Auckland property and the sharemarket.
Low inflation is seen as a good thing, helping to maintain the buying power of consumers, and may be helping to support confidence. However, extremely low inflation has seen one bank, ASB, push out its prediction for the Reserve Bank’s first rate rise from December this year to March 2014.
TD Securities, on the other hand, said it was still expecting the Reserve Bank to be the first Western central bank to start raising rates, to 2.75 per cent by the middle of the year, because of higher building costs and rising property prices.
The new inflation figures show that prices are being held down by discounting on imported goods, especially clothing and appliances, with things like televisions down about 17 per cent in the past year.
As consumers keep paying off debt, retailers are having to discount heavily to make sales.
Despite worries that the world economy might falter and that the Australian economy is slowing, BNZ economist Doug Steel said the chance of a rate cut was low.