N.Z. Inflation Quickens as RBNZ Set to Raise Rates in 2014

New Zealand inflation accelerated faster than economists forecast in the third quarter, ending more than a year of subdued price pressure and underpinning the Reserve Bank’s case to start raising interest rates in 2014.

Consumer prices rose 0.9 percent from the second quarter, when they gained 0.2 percent, Statistics New Zealand said in Wellington today. That’s the biggest increase in more than two years and more than the 0.8 percent median forecast in a Bloomberg survey of 12 economists. The annual inflation rate climbed to 1.4 percent, the highest in 18 months and back within the RBNZ’s 1-percent-to-3-percent target band for the first time since the second quarter of last year.

“Being back in the band will be an important threshold for the Reserve Bank,” said Dominick Stephens, chief economist at Westpac Banking Corp. in Auckland. “The RBNZ may now be more emboldened to discuss increasing the Official Cash Rate next year.”

New Zealand is on track to become one of the first developed nations to start tightening monetary policy in the wake of the global financial crisis. The Reserve Bank has said it’s likely to lift its benchmark rate from a record-low 2.5 percent in the first half of 2014 as the housing market booms, economic growth gathers pace and inflation moves toward the middle of its target band.

Strong Dollar

New Zealand’s dollar climbed after the inflation report, before falling to trade little changed at 83.83 U.S. cents at noon in Wellington. Its strength over the past year has damped import prices and helped contain inflation.

Tradable prices rose 1.2 percent in the third quarter from the second, the first increase in five quarters, today’s report showed. Non-tradable prices increased 0.7 percent.

The statistics office said more than half the increase in the consumer price index came from higher petrol and vegetable prices. If those prices had remained unchanged, the CPI would have risen 0.3 percent from the previous quarter, it said.

Economists had forecast a 1.2 percent year-on-year rise in the CPI, up from 0.7 percent in the second quarter.

Business confidence surged to a 14-year high in the third quarter, signaling the economy is rebounding from a mid-year slowdown caused by a drought, the New Zealand Institute of Economic Research said last week.

Faster Growth

The RBNZ on Sept. 12 raised its growth forecast for the year through March 2014 to 3.2 percent from 3 percent, citing construction in the earthquake-damaged city of Christchurch and a boost to spending from rising house prices in Auckland. Growth will peak at about 3.5 percent in mid-2014, it said.

“With large housing construction requirements in Canterbury and Auckland over the next few years, capacity constraints in the construction industry will continue to translate into stronger price increases,” said Jane Turner, senior economist at ASB Bank Ltd. in Auckland.

Economists expect the central bank to start raising rates in March, according to the median of 15 forecasts in a Bloomberg survey. By contrast, the Reserve Bank of Australia will hold its key rate at 2.5 percent through 2014, another survey shows.

The U.S. Federal Reserve, Bank of England, European Central Bank and Bank of Japan have all signaled they’ll keep monetary stimulus in place for an extended period to help foster economic recoveries.

Lending Restrictions

The RBNZ has held its key rate at a record low since early 2011. Governor Graeme Wheeler has been reluctant to raise borrowing costs because it may drive demand for New Zealand’s currency, which surged to a 20-month high in April, and dent the economic recovery. In an effort to rein in booming house prices without raising rates, he imposed limits on low-deposit home loans from Oct. 1.

Still, the kiwi has rallied over the past month as U.S. lawmakers struggled to reach agreement on raising the nation’s debt limit, increasing the risk of a default.

“Considering the global outlook remains murky and the New Zealand dollar is still in the stratosphere, it is likely the RBNZ will remain content for some time yet to stay on the sidelines and observe how prudential policy measures are impacting on the residential property market,” ANZ Bank economists wrote in a research note this week.

House prices rose 8.4 percent in September from a year ago, with prices in the Auckland region surging 13.6 percent, according to a government-owned property research company.

The RBNZ estimates that its lending restrictions will curb home sales and reduce house-price inflation by as much as 4 percentage points. Deputy Governor Grant Spencer said yesterday that the mortgage lending limits may ease upward pressure on the dollar by reducing the extent of interest-rate increases.

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