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14 Mar 2014

Inflation Forecast Up

The New Zealand Central Bank has lifted interest rates from 2.5 to 2.75 percent, largely in response to stronger than expected economic growth and inflation figures.  Inflation is now predicted to reach the 2 percent midpoint of its target range 18 months sooner than the last estimate in December, as the New Zealand economy surges ahead thanks to soaring dairy exports, a construction boom, and rising property prices.
“While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue to do so over the next two years... In this environment it is important that inflation expectations remain contained.” said Reserve Bank Governor Graeme Wheeler when announcing the recent interest rate hike.  Indeed, the Central Bank's strict adherence to the 2 percent midpoint is the biggest factor influencing the recent interest rate rise.

Some economists are even predicting inflation to rise above the targeted 1-3 percent range, with the economy growing by a healthy 3.3 percent in the year ending February.  Larger than expected growth has cemented the anticipated rate rise, with a number of BNZ economists forecasting stronger GDP growth over the next couple of years. 

According to BNZ senior economist Craig Ebert in an "Economy Watch" note, we can expect 4.1 percent growth for 2014 and 3.5 percent for 2015.  "This compares to the 3.9% and 2.3% we forecast previously. Our expectations for 2016 are down at 1.8%, from 2.2%. So we still have growth peaking this year, but at a slightly stronger pace and, more to the point, much less of a slowdown in 2015. Outright, this means sustained, above-trend, growth for a good couple of years." said Ebert.

Along with the ongoing construction boom in Christchurch and the surging property market in Auckland, growth is also being affected by rising immigration levels and growing business confidence.  Permanent immigration was the highest in January since May 2003, according to a government report released in February.  Business confidence rose in February to the highest level in almost 20 years, according to a recent report by ANZ Bank New Zealand.

“With inflation now rising and inflationary pressures building, there is a need to return interest rates to more-normal levels,” the bank said in its Monetary Policy Statement.  "The speed and extent to which the cash rate will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures.”

Inflation is expected to reach the 2 percent point by mid-2014, up from 1.6 percent in the previous estimate.  That level is expected to remain for the next three years, with a lot of help from rising interest rates over the same period.  The Reserve Bank said the official cash rate would need to rise by "about 2 percentage points" over the next two years to keep inflation in this range, with the next rise expected in April and more likely to follow in 2015.