Inflation expected to peak at 4-5%

The Reserve Bank's interest-driving official cash rate is predicted to remain unchanged at 3% on Thursday, despite predictions New Zealand's inflation may peak at 5% during the year.

The OCR has been unchanged at 3% since July last year, following a 12-month period to April last year when it sat at a record low of 2.5%, before edging up as the effects of the global financial crisis began easing.

Westpac chief economist Brendan O'Donovan said the annual inflation rate of 4% did not present an immediate concern to the Reserve Bank and predicted the OCR would be left unchanged.

The Reserve Bank is likely to reiterate its December monetary policy statement that tightening is unlikely to resume until the third quarter of 2011.

"With the economy running even further below potential than thought, the Reserve Bank will regard domestic inflation pressures as benign," Mr O'Donovan said in a statement.

He said inflation was expected to be above 4% and could peak above 5% during the year, but New Zealand's economy was not generating a lot of inflation "under its own steam right now".

He said the 4%-plus predication included a one-off spike from the Government increasing GST, and partially to rising fuel prices and global trends of rising food prices - both of which would have to be watched closely during 2011, he said.

Since the central bank's December statement, there had been one "shocker" of major news, in that GDP for the quarter to September fell by 0.2% - as opposed to Reserve Bank and market expectations of a 0.3% rise.

"Nature played a spoiling role via the autumn drought, September storms and the Canterbury earthquake," Mr O'Donovan said.

"But the fact remains that the economy has not shown anywhere near the momentum that it should at this stage of a recovery," he said.

The ANZ said that the combination of recovering demand and rising inflationary pressure from the likes of food and energy prices was expected to necessitate the withdrawal of monetary policy stimulus from mid-year.

"However, this remains contingent upon the world scene holding together.

"At present the United States looks to be recovering a bit more quickly than expected, but sovereign risks remain in Europe and inflationary pressure is going to create business cycle challenges for Asia.

The bumpy ride is expected to continue," NZPA reported.

Goldman Sachs said the economic data had vindicated the RBNZ's dovish stance in its December monetary policy statement.

"As a result, we expect a similar cautious message to be delivered," Goldman Sachs said.

ASB said that the underlying trend in retail sales data released on Friday was weak.

"This adds to the recent softness in activity data, and with inflation pressures contained for now there is little urgency for the Reserve Bank to resume the reduction of monetary policy stimulus.

"We expect the Reserve Bank will leave the official cash on hold until the September meeting."