New Zealand Annual Inflation Eases to 7.2 Percent, Economists Warn of Higher Interest Rate Hikes

Fresh produce is sold at the Wesley Market in Mt Roskill in Auckland, New Zealand, on Sept. 2, 2011. Phil Walter/Getty Images

New Zealand’s quarterly inflation rose to 2.2 percent in the three months to September, while the annual inflation rate edged down to 7.2 percent, according to Stats NZ.

This follows a 1.7 percent quarterly inflation and 7.3 percent annual inflation over the 12 months to June—a 32-year high.

Inflation during the quarter was mainly driven by food, housing, and transport.

Vegetables rose 24 percent, the largest quarterly rise in vegetable prices since the series began in 1999,

“Tomatoes, lettuce, and broccoli drove this rise in vegetable prices,” Stats NZ senior manager Nicola Growden said.

Despite the slight drop in annual inflation, it still far surpassed expectations of around 6.5 percent.

Many economists have increased their expectations for the next official cash rate (OCR) call to a 0.75 percent hike after the data indicated inflation was still too strong.

“The ingrained and intense level of inflation are alarming and will force interest notes to rise higher, faster to combat pervasive pricing pressures across the domestic economy,” Infometrics principal economist Brad Olsen said.

“There’s no question now that the OCR will rise further, and the RBNZ [Reserve Bank of New Zealand] will need to weigh up how to get stubborn inflation under control.”

Meanwhile, ANZ Bank economist Finn Robinson expects two consecutive 0.75 percent hikes in both November and February.

“Both hikes are contingent on global financial markets keeping it together. Such large moves so late in the cycle are risky, no question, and could well turn out to be a mistake. But today’s data gives the RBNZ little choice,” he said.

Government Reaction

Finance Minister Grant Robertson said with inflation slightly easing, it was important that the government had a balanced approach to target spending.

“The government will continue to carefully target spending in these highly uncertain times,” he said.

“While the future is still highly uncertain, economists believe we are now past the peak of the cycle. However, inflation is expected to remain elevated for some time compared with what has been experienced in recent times.

“New Zealand cannot escape the global pressures affecting prices at the pump, supermarket, and the hardware store but we find ourselves well positioned to respond.”

However, National’s Finance spokesperson Nicola Willis said prices were “making a mockery” of Labour’s statements about a strong economy.

“These inflation figures are much worse than even the most pessimistic predictions, and make the Reserve Bank’s hopes of a slow-down look wildly out of touch. Bottom line: New Zealanders must yet again brace for more pain in their back-pockets,” she said.

ACT Party Leader David Seymour called on the government to “take responsibility” for its spending and its Reserve Bank legislation.

“The Reserve Bank distorted government policy making by giving it cheap credit, now we are all paying the cost, literally in the rising price of everything,” he said.