WELLINGTON: Rising construction costs and food prices are believed likely to drive New Zealand consumer inflation to a two-year high in the second quarter, bolstering expectations for an interest rate rise next week as the central bank tackles growing price risks.
A Reuters poll shows economists expect the consumer price index due on Wednesday to have risen 0.4 percent in the three months to June, taking the annual rate to 1.8 percent, the highest since December 2011.
Analysts said they expected the CPI figures to show consumer prices beginning to catch up to an ongoing rise in building-related inflation. "If the domestic inflation picture turns out to be as strong as we expect, it would strengthen the case (for a rate rise next week)," said Westpac senior economist Felix Delbruck.
"The hurdle for the Reserve Bank not to raise rates next week is a high one." Analysts expect that a higher than usual increase in food prices will feed into inflation for the quarter, along with electricity prices and construction costs, which have been fuelled by earthquake reconstruction projects in the Canterbury region and a housing boom in Auckland.
At the same time, ongoing strength in the New Zealand dollar, which hit a post-float high against a currency basket last week, is seen keeping any rise in tradeable goods inflation subdued during the June quarter.
A quarterly reading of 0.4 percent would be slightly higher than the RBNZ's estimate of 0.3 percent, while an annual print of 1.8 percent would creep closer to its inflation target of 2 percent.
This would add to the view that the Reserve Bank of New Zealand will lift its official cash rate by 25 basis points to 3.5 percent at its review next week, in line with markets pricing for an 88 percent chance of a hike.
This would be the fourth tightening since March, when the RBNZ began raising rates from a record low 2.5 percent to become the first developed-country central bank to begin raising rates in the current monetary cycle.
DELICATE BALANCING ACT
Many economists see inflation continuing to edge higher later in the year on buoyancy in the construction sector and rising domestic demand. "We expect a strengthening demand backdrop to lift core inflation further, with annual CPI inflation on track to approach the inflation target mid-point by mid next year," ANZ analysts said in a note.
But they added that the RBNZ could face a delicate balancing act in the coming months between strong demand and a persistently strong currency.
As rates rise towards the RBNZ's neutral rate around 4.5 percent to 5.0 percent, RBNZ Governor Graeme Wheeler has said future rate rises will depend on inflation figures and strength in the New Zealand dollar.
The central bank has forecast that official rates will rise to around 5.0 percent by the end of 2016.
Most economists polled by Reuters expect the RBNZ will pause its tightening cycle after a July hike, as the ongoing rise in the "kiwi" dollar may help to lower imported inflation, which could limit any rises in overall inflation.
New Zealand's $185 billion economy continues to outperform many other developed countries, growing an annualised 3.8 percent in the January-March quarter due largely to earthquake reconstruction projects and rising demand for dairy products, the country's biggest export.
But signs that the country's terms of trade may have peaked at a 40-year high while its overheated housing market starts to calm down suggest that the economic cycle may be maturing, which may ease inflation risks in the future, reducing pressure on the central bank to raise rates in future.
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