17 Apr 2014

Few rates hikes possible - economist

6:27 am on 17 April 2014

Economists do not expect lower-than-expected inflation will deter the Reserve Bank from raising interest rates next week - but it may mean fewer hikes later this year.

Inflation came in below expectations at 0.3 percent for the March quarter and 1.5 percent for the year ended March.

Economists had expected the Consumers Price Index (CPI) to rise between 0.4 and 0.6 percent for the quarter and between 1.6 and 1.8 percent for the year.

The Reserve Bank has forecast a 0.5 percent quarterly increase and a 1.7 percent annual rise, compared with the 1.6 percent outcome for calendar 2013.

Statistics New Zealand said the main downward contribution for the quarter was from lower international airfares, and cheaper vegetables and package holidays, while the main depressor of the annual increase came from cheaper audio-visual and computing equipment.

The strong New Zealand dollar had had a downward influence on the retail prices of internationally traded goods, including cars and appliances, SNZ said.

Westpac chief economist Dominick Stephens said domestically generated inflation was gradually rising.

"From our perspective, this won't be enough to kaibosh the hikes that were penciled in for April and June this year, Mr Stephens said.

"We still think the Reserve Bank will lift the OCR (Official Cash Rate) over the next couple of meetings.

"However, the downside surprise on inflation and the higher exchange rate do together suggest that the Reserve Bank might tone down its expectations for just how much the OCR needs to go up over the next two years."

Dairy prices were also falling, and the exchange rate was rising, a combination which was likely to produce lower inflation which in turn meant the OCR did not need to be hiked as much, Mr Stephens said.

The OCR was raised to 2.75 percent on 13 March after being at 2.5 percent since March 2011.