The Reserve Bank of Australia again has raised its benchmark interest rate (this time to 4.5%), saying inflation will move into the top half of its average 2%-to-3% target range in the year ahead. The RBA board has been out in front in lifting interest rates in the wake of the global economic recession. NZ’s official cash rate, in contrast, hasn’t budged since it was dropped to 2.5% in April last year. But the recession shrunk NZ’s output and reduced inflation pressures, as it did in many countries. Aust was an exception. Its fortunes were helped by China’s demand for iron ore, coal and other minerals, but continuing Asian economic growth is the source of inflation concerns by lifting raw-material prices.

Rising Prices. NZ timber prices are being similarly lifted, along with those of other building materials. More important, when gauging inflation pressures and the timing of the next OCR rise to counter the CPI effects, a raft of price rises is looming as a result of Govt policy initiatives. Tobacco taxes have been raised already. Much heftier, the first phase of the emissions trading scheme will take effect from 1 July. Initially this will lift petrol and electricity prices as higher production costs are passed through to retail prices; indirectly it will raise the prices of energy-intensive goods and services such as transport. And then the Budget this month is bound to raise GST on all goods and services. Annual inflation is projected to spike at 5% within the next 12 months, although the RBNZ treats Govt-policy-induced price rises as one-offs like an oil shock for monetary policy purposes.

Flow On Effects. It’s the secondary-round effects that will bother the governor. These typically are transmitted through the labour market and wage demands, but above-average unemployment – helped by personal income tax cuts to offset GST rises – will temper the impact this time. Wage pressures won’t build until labour shortages re-emerge, probably not for the next year or so.
There is plenty of spare resource around NZ, too, to moderate inflation (eg commercial property rents are falling as available supply rises). Even so, the RBNZ will want to start nudging the OCR back up if only to give it the room for manoeuvre if it must cut interest rates to deal with something unexpected further down the track. So we should start to follow the Aussies with rising interest rates on 10 June or on 29 July.

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