Little evidence the RBNZ needs to aggressively raise rates

New Zealand consumer prices rose less than expected in the second quarter as a decline in the price of food softened the impact of higher liquor and tobacco prices, providing little evidence that the central bank needs to aggressively hike interest rates.

Friday, July 16th 2010, 4:15PM

by BusinessWire

The consumer price index rose 0.3% in the three months ended June 30, slowing from a 0.4% pace in the first quarter, according to Statistics New Zealand. Economists had expected a 0.5% increase, based on the median in a Reuters survey, with forecasts ranging from 0.3% to 0.8%. Annual inflation was 1.8%, slipping from 2% in the 12 months through March 31.

The New Zealand dollar fell to 72.38 US cents after the data, from 72.69 cents immediately before the report was released.

Economists expect Reserve Bank Governor Alan Bollard will lift the official cash rate a quarter point to 3% this month though he has previously signaled the scope of the tightening cycle may not be as great as in previous periods of rate hikes.

Inflation is set to accelerate short-term on the back of costs of the Emissions Trading Scheme, higher goods and services tax and ACC charges.

"People are still expecting the RBNZ to go in a fortnight's time, so the kiwi is reasonably underpinned for now," said Darren Gibbs, chief economist at Deutsche Bank.

Interest rate increases are a questions of timing and "you could probably make a case that you could take a little bit more time getting there than you could have a few months ago. There's not a lot of pricing power out there."

Alcoholic beverages and tobacco prices rose 8.7% in the second quarter from the first quarter as a result of an increase in excise duty, making the biggest positive contribution to the CPI. Higher prices for petrol lifted transport prices by 0.9% while housing and household utility prices rose 0.5%.

Food prices declined 0.9% and household contents and services dropped 0.7%.

Annual inflation measured by the CPI is sitting just below the mid point of the central bank's 1% to 3% target range.

Bollard, who targets inflation 18 months out, lifted the OCR from a record low 2.5% last month, the first increase since before the global financial crisis, saying the economy was getting to the stage where it didn't need extraordinary stimulus.

The inflation figures come after a mix bag of economic data. New Zealand retail sales rose a less-than-expected 0.4% in May, with so-called core sales, which exclude motor vehicle related industries, unexpectedly dropping 0.2%.

Total retail sales rose 0.4% in May, following a 0.3% decline in April, according to Statistics New Zealand. Sales growth of 0.6% had been expected, based on the median in a Reuters survey.

Core retail sales, which exclude vehicle-related industries, dropped 0.2%. Real Estate Institute figures for June showed the volume of residential homes sold was the second-lowest for the month in a decade.

Still, consumer surveys show more New Zealanders deem it a good time to buy big-ticket items, with a pick-up in sales expected before GST rises to 15% in October. The May retail figures showed a 3.9% gain in appliance retailing and a 7.5% jump in motor vehicle sales.

Today's CPI report showed so-called non-tradables inflation rose 0.6% in the latest quarter while tradables inflation fell 0.1%

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