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Interest rates forecast to stay low as New Zealand CPI falls
Xinhua | January 18, 2013 11:24
By Agencies
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Interest rates in New Zealand are forecast to stay at a record low for at least another year after the government statistics agency announced the consumers price index (CPI), a leading gauge of inflation, fell by 0.2 percent in the December quarter.

The fall was led by lower vegetable prices and discounting of furniture, which were partly countered by higher housing and transport prices, according to Statistics New Zealand.

"The CPI has fallen in four of the past five December quarters

the exception being 2010, after the GST increase," prices manager Chris Pike said in a statement Friday, referring to a rise in the Goods and Services Tax (GST), a consumption tax, from 12.5 percent to 15 percent in October 2010.

Food prices fell 1.8 percent, household contents and services were down 1.8 percent, and communication prices were down 2 percent, making them the main contributors to the December quarter 's fall.

Meanwhile, housing and household utilities, and transport prices were up 0.6 percent.

The fall in food prices was due to seasonally lower vegetable prices, which were down 16 percent.

The fall in household contents and services prices was largely due to lower prices for furniture and furnishings, which were down 6.2 percent, reflecting higher levels of discounting.

"One in four furniture and furnishing prices was discounted in the December quarter, compared with one in five in the September quarter," Pike said.

Petrol prices were 0.8 percent down in the December quarter, putting them 1.7 percent below their June 2012 quarter peak.

Annually, the CPI increased 0.9 percent in the year to the December 2012 quarter, due to increased prices for cigarettes and tobacco (up 13 percent), rentals for housing (up 2.4 percent), and electricity (up 5.2 percent).

These movements were partly offset by decreases in the price of telecommunication services (down 5.7 percent), audio-visual equipment (down 17 percent), and fresh milk (down 9.5 percent).

The main opposition Labour Party said the quarterly drop in prices coinciding with a housing market boom and a stubbornly high New Zealand dollar showed the need for monetary policy reform away from its focus on controlling inflation within a band of 1 percent to 3 percent.

Labour finance spokesperson David Parker said deflation in the December quarter showed the high exchange rate was more of a problem than inflation.

"Our monetary policy has passed its use-by date. The Reserve Bank has a tunnel vision mandate that requires it to primarily consider the prospect of increasing inflation. This pushes other big issues - our overvalued and damaging exchange rate down the priority queue," Parker said in a statement.

"This is despite unemployment at 13-year highs, a stagnating economy and a 10-billion-NZ-dollar external deficit, which is worse than every developed country bar Greece."

An Economic Update from the ASB Bank said it was not the first time inflation had undershot widespread and low forecasts.

A combination of discounting and impacts of the high New Zealand dollar were still dampening traded goods prices, it said.

"We expect inflation will remain near 1 percent for the next two quarters, and still be below 2 percent at year-end, so even reported inflation won't be much of a prod for higher interest rates this year," it said.

The bank has shifted its forecast for the Reserve Bank of New Zealand raising the official cash rate (OCR) from December this year to March 2014.

The OCR has been sitting at the record low of 2.5 percent since March 2011.

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