Higher inflation to hit rates?

Inflation accelerated in the first quarter, increasing expectations the Reserve Bank will lift the official cash rate (OCR) next week to mitigate the effects of demand growth in coming years. The consumer price index jumped by 0.5 per cent in quarter one to 1.7 per cent, making it the fastest annual rate since 2011’s fourth quarter. Reserve Bank governor Graeme Wheeler raised the OCR to 2.75 per cent last month – the first hike since 2010 – and may lift it to three per cent next week. The inflation rate and policy response will depend on the behaviour of households and businesses in an economy with growing construction activity and migration with loan restrictions yet to conclusively show up through cooling house prices. The Reserve Bank expects inflation to reach two per cent this quarter and some economists see a faster pace of inflation. The BNZ-BusinessNZ’s performance of composite index, which combines manufacturing and services, jumped 5.1 points to 58.4 in March. With growth in building consents that suggests “upward pressure on inflation,” says BNZ economist Doug Steal. The NZIER’s March 2014 quarterly survey of business opinion released last week shows 37 per cent expect average selling prices to rise in this quarter. Nick Tuffley, ASB’s chief economist, expects non-tradable inflation of 1.3 per cent in the first quarter to offset a 0.3 per cent drop in tradable inflation because of a strong kiwi dollar. “Inflation turned a corner last year and is back in focus given signs of capacity pressures.” And he expects inflation to peak at 2.5 per cent in 2015, partly on expectations the kiwi will weaken in coming years.