NZ retailers absorb GST hike, give Bollard room to pause

NZ retailers absorb GST hike, give Bollard room to pause

By Paul McBeth

Jan. 20 (BusinessDesk) – New Zealand retailers took the government’s hike in goods and services tax on the chin as the quarterly inflation rate rose to 2.3%, giving the Reserve Bank room to keep interest rates at historically low levels.

Statistics New Zealand prices manager Chris Pike told a media briefing in Wellington the lowest pass-through of the GST hike to 15% from 12.5% in October was from outlets selling home appliances and furniture and department stores. About 10% of prices collected increased in line with the GST hike, half rose by a smaller amount, and just one-in-four of surveyed prices rose by more than the tax hike, he said.

That effect helped underpin an underlying inflation figure of 0.3%, which strips out the 2 percentage point impact of the GST hike, in line with Reserve Bank forecasts, and gives Governor Alan Bollard room to keep the official cash rate at a “stimulatory” 3%. Annual inflation was 4%, outside the central bank’s 1%-to-3% target band, though Bollard is able to look through one-off impacts such as the tax increase.

“There doesn't seem to be any underlying issues around inflation so there's no sign of the genie getting out of the bottle,” said Craig Brown, who helps manage $1.1 billion in equities for OnePath New Zealand. “With the numbers in line with expectations it means the RBNZ shouldn't have to raise rates before the third quarter of this year.”

Traders are betting Bollard will hike rates by 61 basis points this year, according to the Overnight Index Swap curve, and today’s underlying figure means he’s not under any pressure to bring forward rate increases.

Bollard tightening monetary policy after two mid-year hikes amid a stalling economic recovery that narrowly dodged dipping back into recession. Gross domestic product shrank 0.2% in the December quarter as consumer spending stayed in the doldrums with households looking to repay debt rather than ramp up expenditure.

A Goldman Sachs & Partners report yesterday showed retailers are feeling the pinch and will have to tighten their belts further this year, with the investment bank predicting retail sales will grow just 1.4% over the coming year, half a percentage point lower than last year.

Service price gains outpaced goods, up 2.8% compared to 2% in the quarter, as retailers were forced to discount goods amid soft consumer spending. Clothing prices fell 0.2% in the quarter, while glassware, tableware and household utensils dropped 0.4%. Audio-visual and computing equipment prices fell 1.7% and telecommunications equipment dropped 6.1% in the period.

The kiwi dollar dropped to 76.46 U.S. cents from 76.87 cents immediately before the release, and OnePath’s Brown said the strong currency has helped keep costs down for retailers.

“With the high currency this is an opportunity for importers - they are able to buy product - so again no risk of importer inflation,” Brown said.

Tradables inflation rose 2.5%, while non-tradables increased 2.2%, showing the greater impact of the GST hike on goods and services facing foreign competition.

Rising petrol prices reported the biggest increase, up 6.8% in the period and 14.2% annually, due to the GST increase, and higher excise duties and international prices. The transport group reported a 4.3% increase in prices for the quarter, bolstered by a 5.5% rise in international flights and a 7.1% lift in domestic air travel.

Food prices rose 2.1% in the quarter, though the food price index, released earlier this week, registered monthly declines in November and December, trimming the annual gain to 4.9%, with fresh milk prices surging 14.6% in the biggest individual increase. A 2.7% increase in grocery prices was the biggest contributor to the group.

Dairy prices remained strong last year after bouncing back from a low in mid-2009, and extended gains in Fonterra Cooperative Group’s online auction this week. Central bank Governor Bollard expects farmers will be able to cash in on the upswing in commodity prices later this year once they’ve repaid their debt, and that will help kick-start the economy.

Statistics NZ said the increase in GST may not be reflected by some seasonally available items, and will come through in releases later this year.

(BusinessDesk)

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