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Monthly Economic Indicators

Executive Summary

  • Consumer price inflation rises to 1.4% on higher fuel prices and seasonal increases in vegetable prices...
  • ...bank lending restrictions and the recent appreciation of the exchange rate may restrain future increases in inflation
  • Business sentiment remains buoyant and other indicators of activity support the positive outlook
  • US fiscal uncertainty drives market volatility

Annual consumer price inflation increased to 1.4% in the September quarter on higher fuel prices and seasonal increases in vegetables prices.  Annual inflation is expected to remain at a similar level in the December quarter and to move gradually higher over 2014 as growth in activity rises to an above-trend pace.   

Initial impressions are that the Reserve Bank’s restrictions on high Loan-to-Value Ratio (LVR) lending, which came into effect at the start of October as a macroprudential tool to reduce financial stability risks, are having the expected effect of dampening growth in mortgage finance and reducing the risk and potential impact of a major correction in house prices.  If these initial impressions are borne out in subsequent data releases, the Reserve Bank may have more flexibility as to when and how quickly it raises interest rates.  This flexibility is reflected in financial markets, which now attach a greater probability to the first OCR rise being in April rather than in March.  The recent rise in the exchange rate is also influencing interest rate expectations through its depressing effect on traded goods prices.  

The positive outlook for the economy was reinforced by September’s trade data, which confirmed the recovery from the summer’s drought was underway and by rising net migration inflows.  Business sentiment remained buoyant in the September quarter, with surveys reporting increases in confidence and activity. 

US fiscal uncertainty affected market sentiment in October, and contributed to expectations that the Federal Reserve (Fed) will delay tapering asset purchases until March 2014. Non-US economic developments were generally positive.

This month’s Special Topic draws on recent data from the International Monetary Fund (IMF) on the international fiscal consolidation experience so far and how New Zealand compares.

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