2017.07.2110:00:00UTC+00RBNZ Unlikely To Raise Interest Rates Until 2019 On Weaker Inflation

The Reserve Bank of New Zealand is unlikely to raise its interest rate until 2019, as the economy is still not generating much inflation, Paul Dales, an economist at Capital Economics, said.

Consumer prices remained flat in the second quarter and the annual inflation rate eased to 1.7 percent from 2.2 percent, official data revealed on July 17.

Dales noted that the latest data won't worry the RBNZ as it always expected inflation to drop back below the midpoint of its 1-3 percent target and as inflation is still well above the lowest point of 0.1 percent in late 2015.

The economist expects inflation to probably fall further in the third quarter to 1.5 percent.

Looking ahead, the downward influence from petrol prices in the second quarter will probably be even larger in the third quarter.

More importantly, Dales suspect that the various measures of underlying inflation will also edge a little lower.

The 0.2 percent quarterly drop in consumer prices is not as unusual as it sounds as prices are always soft in the second quarter.

The latest fall was the largest since early 2010 and it meant that the annual inflation fell back from 1.6 percent to 1.4 percent, the economist observed.

Nonetheless, these figures won't reignite fears of deflation, but they highlight that even the current strength of the economy isn't enough to generate much inflation, Dales said.

The economist predicted that the RBNZ is unlikely to follow the Fed and the Bank of Canada by raising interest rates until it looks as though core inflation will stay close to 2.0 percent.

"As that probably won't happen until 2019, the markets will have to change their view that interest rates will rise next year," the economist added.