NZ prices to start falling - BNZ

Friday, 10 October 2008

New Zealand's high prices are set to ease in the wake of the global financial crisis, the BNZ said.

Consumer Price Index (CPI) inflation was at 4 percent in the June quarter, well outside the 1-3 percent policy target.

Statistics NZ will publish the September quarter CPI on October 21.

The BNZ predicted a 1.5 percent increase then, raising annual inflation to 5.1 percent.

"Yet 5.1 percent will not only be the peak, but annual CPI inflation will very soon be tumbling," the Bank said.

"Global inflation concerns are not just fading, but are morphing into worries that deflation might be the next big threat on the CPI front.

"While financial market disturbances and dysfunction are certainly hogging everyone's attention right now, and understandably so, it pays to keep sight of the inflation emphasis in the central banking equation."

The US Federal Reserve, the European Central Bank, Bank of England and central banks in Sweden, Switzerland, South Korea, Taiwan, China and Hong Kong all cut interest rates in a coordinated move.

The Reserve Bank of New Zealand has a regular review of its official cash rate, currently 7.5 percent and among the highest in the world, on October 23.

BNZ said inflationary pressures had started to moderate in many countries, as indicated by declining energy, commodity and oil prices.

"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted."

This will see New Zealand inflation fall "noticeably" over the next year or two.

"The immediate test of this will be the upcoming Producers Price Index (PPI) and CPI figures from around the globe. We anticipate some big monthly drops, which will bring headline annual rates down sharply from recently worrying peaks.

"The recent financial turmoil has added to the downside pressures and risks."

The BNZ said the "normally slow moving" International Monetary Fund's (IMF) slashing of international growth forecasts was the result of global economies slipping into recession.

The IMF was predicting 2009 to be the slowest year since 1982.

"That says an awful lot. It's easy to imagine, therefore, that spare capacity will open up across the industrialised world, and that labour markets around the world will also slacken. This will go a long way to bringing core inflation pressure, in terms of consumer prices and wages, back down to earth."

Disinflation may even become deflation in a situation similar to 1980s property and financial excesses in Japan, the bank said.

"Deflation is certainly feasible, arithmetically, in respect of the headline PPI and CPI indices. But it may also be fundamentally brought into play should the global economy go into a real tailspin, amid ongoing dysfunction in the credit markets, and with policy officials limited in their options to make much, if any, difference."

NZPA