August 2018

Statistics New Zealand (StatsNZ) have revealed that consumer price inflation (CPI) increased by 0.4% in the second quarter, which is lower than the 0.5% increase previously forecasted by economists. Banks and authorities are prepared to take actions to boost the inflation rate if necessary, to keep the economy within healthy parameters for investment.

Petrol prices, a key variable in determining inflation the rate, rose by 3.2% over the previous quarter according to StatsNZ. In May, petrol reached a peak of $2.299 per litre across most of the country due to rising global oil prices as well as local currency depreciation, contributing to New Zealand’s modest inflation rate – but it may not be enough. "Maintaining inflation around 2 per cent next year would require a further surge in world oil prices and/or a continued slide in the exchange rate," said Dominick Stephens, a Westpac chief economist.

The year-on-year CPI rate escalated 1.5% from last year, corroborating the RBNZ’s latest forecast. Meanwhile, many experts believe that it will eventually reach a high point of 2% this year.

The biggest contribution to this inflation stemmed from housing and household utilities, which increased by 0.9%. Subsectors experiencing increases included rent (0.8%), dwelling construction (1.1%), electricity (1.7%) and food spending (0.8%).

Other sectors of the economy contributed little to inflation this quarter. In the wake of the tobacco tax increase, alcohol and tobacco items, transport costs and other trivial goods accounted for approximately a 0.2% expansion. And the prices of education, communications and recreational items fell.

The principal responsibility of the Reserve Bank of New Zealand (RBNZ) is to maintain the inflation rate within the range of 1-3 percent. Consequently, there is no near-term measure RBNZ is going to implement on monetary and interest policies owing to current conditions. An overnight cash rate will likely level out at 1.75% for the time being.

Several sectors expect RBNZ to consider executing some plans to boost the country’s growth. "We expect that the RBNZ will be concerned with the underlying trend in inflation and its persistence over the medium term. This means that the RBNZ will be willing to ‘look through’ higher CPI inflation to the extent that it is not expected to be permanent," analysts at ANZ Bank New Zealand Limited stated.

Reserve Bank Governor Adrian Orr said earlier this month that “the recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions.” If inflation remains stagnant, RBNZ will lower the interest rate so as to trigger inflation and overall consumption. Companies can then borrow money more cheaply in order to invest or expand their businesses.

As these trends are very much in flux, we recommend that, firstly, accounting firms keep a close eye on the business pages, to keep abreast of developments in interest rates. Secondly, the government should step in and take appropriate measures if the economy starts to slow down. Lastly, businesses should get ready to take advantage of low interest rates if the government takes action.