Inflation unexpectedly slows; economists expect more stimulus to come

Friday, 23 October 2020

The annual inflation rate unexpectedly slowed in the third quarter, stoking expectations the Reserve Bank will add further stimulus soon to rev up the economy.

Consumer prices rose 1.4 per cent in the September quarter from a year earlier, Statistics New Zealand said on Friday. That’s slower than the 1.5 per cent inflation rate in the second quarter, and less than the 1.7 per cent expected by economists.

“Prices are simply not rising as much as expected,” said Kiwibank chief economist Jarrod Kerr. “Covid-related caution has had an impact, and the outlook for inflation is weaker as a result. The weaker starting point will only support the Reserve Bank’s resolve to do more, and do it early.”

The Reserve Bank this year cut the benchmark interest rate to a record low 0.25 per cent and it’s expected to push the rate into negative territory early next year to provide further stimulus as the impact of the Covid-19 pandemic dents employment and spending. It’s also considering helping fund bank loans through a Funding for Lending programme, to encourage banks to extend cheaper credit to customers.

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Kerr said Friday’s release would be “of concern” to the Reserve Bank, which targets inflation of between 1 per cent and 3 per cent.

“The Reserve Bank has a mandate to meet,” Kerr said. “But employment and inflation are clearly drifting further away from target. We forecast inflation to drop towards zero next year.

“More stimulus is needed and is expected to come.”

Kerr said he expected the Reserve Bank to introduce a Funding for Lending programme at its November monetary policy statement, and that it would take the benchmark interest rate into negative territory as early as February.

Infometrics economist Brad Olsen said the introduction of the Funding for Lending programme in November was now virtually guaranteed.

“With inflation below expectations, and without any signs of pricing pressures, the Reserve Bank will want to drive down interest rates further to try and stimulate demand – not necessarily to push prices higher in the near-term, but more to stabilise them and prevent prices from falling further,” Olsen said.

“Weak demand will persist as the economy runs at a slower pace, with greater price competition to attract spending and a lack of interest in raising prices when incomes are lower.”

The New Zealand dollar dipped immediately following the release, and then bounced back. It was sitting at 66.72 US cents in early afternoon trading on Friday.