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Low inflation poses economic quandary for New Zealand central bank

Xinhua, July 18, 2016 Adjust font size:

Inflation in New Zealand continued tracking near zero in the quarter to the end of June, according to the latest consumers price index (CPI) out Monday, fueling speculation that the central bank will cut interest rates next month.

The CPI rose 0.4 percent in the June quarter, following a 0.2-percent rise in the March quarter, according to the government's Statistics New Zealand agency.

"Higher petrol and housing-related prices were countered by lower prices for meat and domestic air fares," consumer prices manager Matt Haigh said in a statement.

In the year to the end of June, the CPI inflation rate remained stable at 0.4 percent.

Housing-related prices continued to be the main upward contributor, up 3.3 percent in the year.

"Petrol prices were 8.1 percent lower than a year ago, despite the increase this quarter as international crude oil prices recovered from their February low. Petrol makes up around 5 percent of the CPI basket," said Haigh.

An economic note from the ASB Bank said the CPI inflation rate was below the expectations of the market and the Reserve Bank of New Zealand (RBNZ).

Core inflation pressures appeared to remain low -- a concern for the RBNZ, which aims for the midpoint of an inflation target range of 1 percent to 3 percent.

As a result, the ASB thought the RBNZ would cut the official cash rate (OCR)-- currently at 2.25 percent -- next month by 25 basis points with a further cut to 1.75 forecast for later in the year.

The main opposition Labour Party said the all prices excluding housing and household utilities fell by 0.5 percent, meaning the New Zealand economy was experiencing deflation outside of property.

However, the RBNZ could not act to stimulate the economy without fueling the country's housing crisis, which has seen prices soar in the biggest city of Auckland, home to a third of the population.

"The Reserve Bank should be acting to stimulate the economy, but that is impossible with New Zealand's runaway housing market," Labour Party finance spokesperson Grant Robertson said in a statement.

"Inflation has now been below the 2 percent target since the end of 2011. Clearly the current system is not working and there is an urgent need for a review of the current approach to monetary policy."

The RBNZ has repeatedly warning that skyrocketing housing prices are a risk to the country's financial stability. Endit