Inflation lower than tipped as CPI rises 0.7%

AUCKLAND: New Zealand’s inflation rate was lower than expected over the third quarter, adding weight to the case for more stimulus from the Reserve Bank, economists say.

However, a resurgent housing market will require a fine balancing act from the central bank as it seeks to revitalise an economy still reeling from the impact of Covid19.

Data from Stats NZ showed higher prices for vegetables and rates, and a rebound in the cost of public transport, led to a 0.7% rise in the consumer price index in the September 2020 quarter, taking annual inflation to 1.4%.

The quarterly result was well below the Reserve Bank’s forecast of 1.1%.

‘‘It’s very uncertain, going forward, what the inflation rate will be, but it highlights the difficult balancing act that the Reserve Bank has,’’ ASB economist Mark Price said.

‘‘But in all likelihood, we think more stimulus is needed.’’

Mr Price noted there were signs that the domestic economy — particularly property — was responding to very low mortgage rates and other support measures.

‘‘On the basis of the very weak inflation outlook, and a highly uncertain outlook for the economy, you have to go with what is the most likely course for inflation and the economy as well,’’ he said.

Reserve Bank governor Adrian Orr is expected to unveil plans for the Funding for Lending Programme (FLP) at next month’s monetary policy statement.

Mr Price said he expected the programme to be worth $30 billion to $50 billion, going on the size of similar packages deployed overseas, and to be heavily skewed towards small to mediumsized businesses.

ANZ said from today’s weak starting point, the outlook was for softness in inflation over the medium term and that current low inflation now could serve to reinforce low inflation expectations.

‘‘The case for more monetary stimulus remains clear for now, with an FLP expected to be deployed in November,’’ the bank said.

The Reserve Bank said in August that its monetary policy committee had agreed that a package of additional monetary instruments must remain ‘‘in active preparation’’.

Statistics NZ said the gain in inflation over the quarter more than reversed a 0.5% drop in inflation during the June 2020 quarter, when petrol prices fell sharply as the pandemic hit.

By early June, New Zealand was back to Covid Alert Level 1, but in midAugust, the Auckland region moved back to Level 3. The rest of New Zealand moved to Level 2 at this time.

Covid19 uncertainty was a factor in the 18% rise in vegetable prices over the September quarter.

‘‘Because restaurants and cafes were shut during Covid Alert Levels 3 and 4 in April, many tomato growers delayed or reduced planting their crops during this time because they were not sure if demand would recover,’’ Stats NZ prices senior manager Aaron Beck said. This led to a supply shortage in the September quarter, he said.

Council rate rises have been more muted than usual this year in the wake of Covid19. The 3.1% annual increase in local authority rates and payments is the smallest in 20 years.

Westpac’s Michael Gordon said while the economy had bounced back rapidly from the lockdown, it was still operating well below its preCovid trend, which he expected would put downward pressure on prices.

The annual inflation rate was also likely to drop about 0.3% next year due to the end of the ‘‘jumbosized’’ annual increases in tobacco excise duty, Mr Gordon said. — The New Zealand Herald

❛ The case for more monetary stimulus remains clear for now, with an FLP expected to be deployed in

November