New Zealand's interest rates seem certain to stay lower for longer after inflation reached a 13-year low of 1% in the year ended June.
Some retail banks have started to lift a range of their fixed terms but homeowners with floating mortgages are likely to stay on the variable rate for longer, given expectations the Reserve Bank will leave the official cash rate unchanged until at least March next year.
Statistics New Zealand figures showed the consumer price index - the official measure of inflation - rising just 0.3% in the three months ended June to give the annual figure of 1%.
The market consensus was for inflation to come in at 1.1% for the year, but a variety of factors, each offsetting another, pushed inflation lower than expected.
Looking at the figures, it is possible that the Reserve Bank's 1% to 3% policy target for inflation has already been breached as higher prices for cigarettes and tobacco (up 13%) and rentals for housing (2.3%) made the most significant upward contributions. The increase in cigarette and tobacco prices reflected a 14.49% rise in excise duty on January 1.
Given that the Reserve Bank looks through one-off, or extraordinary, rises in prices, inflation could already be below 1%. Economists were yesterday forecasting headline inflation to be below 1% by the end of September.
In the June quarter, the 0.3% rise came mainly from higher electricity prices and seasonally higher vegetable prices. Those were partly offset by lower prices for things such as telecommunication services, reflecting increased broadband data caps and better-value cellphone services. Milk prices were down 4.6% in the quarter, fruit was down 3.2%, audio-visual equipment fell 3.6% in price and second-hand cars were down 1%.
BNZ economist Doug Steel said the lower inflation was good news.
"Subdued headline inflation might help dampen inflation expectations, which remain elevated. Expectations got disturbingly high a year ago, partly as a result of headline inflation pushing up to 5.3% back then, partly due to the earlier hike in GST."
While one-year-ahead expectations for inflation had pulled back to more comfortable levels, the stickier and more important two-year-ahead expectations were still too far on the high side to be called comfortable, he said.
That was one reason why the Reserve Bank should not, and probably would not, relax.
Yesterday's figures were unlikely to alter the central bank's thinking in any material way.
Regardless, the core measures of inflation were always going to be more important for policy considerations than the headline reading, Mr Steel said.
The headline and core results might further encourage those looking for a further cut in the OCR but medium-term indicators such as capacity utilisation and the difficulty of finding labour were already moving into territory consistent with rising core inflation.
Council of Trade Unions economist Bill Rosenberg said many families would still be struggling to keep up with the cost of living.
"Many workers have faced low wage increases in the past three years and the low inflation should provide an opportunity for wages and salaries to catch up some of the lost ground as long as decent wage increases come through."
