Is now the right time for an interest rate increase?
By Susan Edmunds of RNZ
On Thursday, Stats NZ data showed consumer prices up 0.7% in the September quarter and 3.7% over a year.
Non-tradeable or domestically influenced, prices were up 3.3%, the slowest rate since the start of 2021.
Intentionally influenced prices rose at 4.3%. Fuel prices were a big part of that, 19% higher than a year ago.
Kiwibank chief economist Jarrod Kerr said with fuel price pressure on households and businesses, it was reasonable to ask whether another official cash rate (OCR) increase was likely.
The rate is up for review next week and is expected to increase, probably by 25 basis points.
"It's a bit confronting isn't it?" Kerr said. "It's kind of a double-edged sword.
"You've got this rise in petrol prices that's feeding through to a few things and there's this fear that businesses will pass it on, because they keep telling us they will, yet on the other side, they haven't yet.
"On the other side, it hurts many businesses and households, and the ability of businesses to pass it on is not there. That points to the weakness of the consumer at the moment."
He said the Reserve Bank was wary of acting too late.
"We wouldn't be hiking into this, we would see how things pan out, but from the Reserve Bank's point of view, the risk is being too late, which is why they're going and I have respect for that.
"I wish they would just get it over and done with. If you want to go to 3%, then just get there next week, rip the Band-Aid off, and then provide businesses and households with some certainty that interst rates are not going anywhere for a while."
Infometrics chief forecaster Gareth Kiernan said the problem was the underlying inflation was starting from a reasonably elevated point.
"Although petrol is a major contributor to where the headline number is, the Reserve Bank still doesn't have a lot of room to manoeuvre in terms of keeping broader inflationary pressures under control," he said.
"In particular, the longer fuel prices remain elevated and the exchange rate remains weak, the greater the likelihood that those pressures will flow through into more generalised inflation. It's worth remembering that the economy has been growing over the last year, in contrast to 2024/25, even if it still doesn't feel that great."
He said there was a strong case for getting the official cash rate back to neutral levels of 3-3.25%, compared to its current 2.75%.
"By February, the bank will be able to better assess the effects of fuel prices on the economy, in terms of inflation, but also in terms of suppressing economic growth.
"If the latter is becoming more evident, then the argument for further interest rate rises becomes a bit more difficult to justify, although it might still be necessary, given the bank's primary mandate is controlling inflation."
BNZ chief economist Mike Jones said a theme of the data was that the price rises were becoming more widespread.
"The proportion of items that rose in price increased to 59.7%, up from 56.2% last quarter and the highest since mid-2023. At the same time, the average of the core inflation measures designed to strip out volatility rose to 3.1 percent.
"All of this will concern an inflation-targeting central bank. At 2.75%, the OCR remains at a stimulatory setting.
"We think the Reserve Bank will raise the cash rate next week and probably also signal that there is more to come."
ASB economists said they expected OCR increases in both October and December, but there was a risk that more would be needed.
"We are concerned that inflation over 2027 could prove slow to recede, despite favourable base effects. We do not expect annual CPI inflation to fall below 3% until the end of 2027."
The morning's headlines in 90 seconds, including connections between gangs and politicians cause more election drama, a speedy rescue in Australian floods, and why Donald Trump's angry at LeBron James. (Source: 1News)
SHARE ME