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New Zealand inflation slows to 18-month low, rates seen on hold

Wednesday, January 21, 2015 - 07:25
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New Zealand's annual inflation rate dipped to its lowest level in 18 months in the fourth quarter as a sharp drop in global oil prices fed through to petrol pumps, leaving the central bank likely to keep rates on hold for the rest of 2015.

[WELLINGTON] New Zealand's annual inflation rate dipped to its lowest level in 18 months in the fourth quarter as a sharp drop in global oil prices fed through to petrol pumps, leaving the central bank likely to keep rates on hold for the rest of 2015.

The consumer price index fell 0.2 per cent in the three months to Dec. 31, official data showed on Wednesday, taking the annual inflation rate to 0.8 per cent, the lowest since the second quarter of 2013.

The slowdown in inflation, which took the annual rate below the central bank's 1 per cent to 3 per cent target range, backed the view that the Reserve Bank of New Zealand (RBNZ) will stay on the sidelines for an extended period. "Nil inflation will torpedo any lingering notion of the RBNZ hiking the OCR (official cash rate) in the near term, and could even cause financial markets to begin assessing the risk of OCR cuts," said Westpac chief economist Dominick Stephens.

The RBNZ halted its tightening last September after a burst of four consecutive 25-basis-point interest rate hikes between March and July of last year, taking its cash rate to 3.5 per cent.

But the lack of inflation pressures, a strong currency and weakening commodity prices, especially for the country's top export earner - dairy products, saw the bank take a watch-and-wait approach.

The New Zealand dollar fell to a low of US$0.7630 from $0.7660 before the data. It last traded at US$0.7648. Interest rate futures were higher.

The quarterly fall in the CPI was driven by a 5.7 per cent fall in petrol prices to their lowest level in four years, while costs for fresh vegetables, telecommunications and electronics also fell.

These were partly offset by higher airfares, new home prices and higher housing rents.

Excluding the drop in petrol, consumer prices would have risen 0.1 per cent for the quarter.

The slide in petrol prices has continued in the first quarter, promising another low overall inflation read.

The RBNZ generally disregards such wild price swings when setting rates, but remains on the alert for domestic price pressures - the non-tradables such as housing, electricity, and building costs - which rose 0.3 per cent for the quarter and by 2.4 per cent for the year. "This will have the RBNZ concluding that OCR cuts would be inappropriate," said Stephens.

The economy is forecast to grow around 3 per cent annually for the next couple of years and the RBNZ's December statement forecast inflation gradually rising to the middle of its target band around the end of 2016.

REUTERS