By Roger J Kerr
There appears to be universal comprehension and acceptance that the RBNZ will “look through” the one-off price increase occurring this year which will push the headline inflation rate up to 5.00% or thereabouts.
Government policy changes to the GST rate, ETS induced increases in fuel and electricity prices, excise duties and ACC levies are usually excluded from CPI considerations and forecasts.
The RBNZ’s standard approach is to ignore such one-off price changes in their monetary policy setting deliberations, as long as they do not directly cause “second-round” price increases.
The debate is where the cut-off is between one-off price increases and general inflation coming from higher transport and food prices directly as a result of the higher one-off costs being passed through. In a flat domestic economy with plenty of excess capacity such cost increases are difficult to pass on in to end selling prices.
However the risk of “second-round” inflationary impacts increases when demand and growth lift in the economy.
If you put yourself forward seven months to the end of the year and look forward to what 2011 might bring in terms of economic growth, there is a pretty good chance that the strong export performance this year will transfer through into higher activity levels in the domestic economy. Come December, the RBNZ may well be looking at +4% GDP growth for 2011 with the headline inflation rate sitting at 5.00%.
At that time expect the RBNZ to be looking hard at wages growth and evidence of general inflation from second round effects.
I am not saying that they will necessarily tighten monetary policy a great deal more than what the forward interest rate curves are currently pricing. However the risk has to be increasing that the balance of probability lends that way.
If our agriculture export commodity prices stay at the current record highs and the NZD/USD exchange rate moves lower to the low 0.6000’s, the current term swaps rates may be too low for what transpires in 2011.
* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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