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New Zealand Q2 inflation expected to pick up, but underlying pressures weak

[WELLINGTON] New Zealand's consumer price index was expected to have risen slightly in the second quarter in official figures due out on Tuesday, but is unlikely to change the central bank's stance given weak underlying inflationary pressures.

Ten economists polled by Reuters on average expected CPI to rise 1.6 per cent in the three months to the end of June, up from just 1.1 per cent in the previous quarter.

A rate of 1.6 per cent would be headed towards the Reserve Bank of New Zealand's (RBNZ) target mid-point of 2 per cent. The predicted 0.5 per cent quarter-on-quarter rise outpaced the RBNZ's May forecast of 0.4 per cent.

Nevertheless, the bank was expected to take a cautious approach and was unlikely to waiver from its determination to keep rates at a record low of 1.75 per cent, likely well into 2019. "A crucial consideration for the RBNZ is the degree of underlying inflationary pressure and the extent that this is expected to increase," said Miles Workman, economist at ANZ Bank. "We expect the RBNZ will stay cautious given the inflation pulse remains subdued."

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The expected strong second quarter gains would mask the fact that core inflation was still weak when temporary factors were accounted for. These included rising global fuel prices as well as a weaker New Zealand dollar, which raises the price of imported goods.

Other than those elements - as well the usual rise in housing costs due to a lack of housing supply and construction bottlenecks - inflation was relatively hard to come by.

"On the flipside, core inflation pressures remain relatively subdued and downside risks to the outlook have also increased over recent months," ASB economists said in a research note. Of particular concern was sinking business confidence and expectations of lower activity and investment by firms, which some economists thought would lead the RBNZ to keep rates on hold for longer and even increased the chance of a rate cut.

Statistics New Zealand will issue release the CPI figures at 1045 local time on Tuesday (2245 GMT on Monday).

REUTERS