New Zealand inflation slowdown adds scope for RBNZ rate cut

by NZ Adviser20 Jan 2016
(Bloomberg) -- New Zealand annual inflation slowed in the fourth quarter to its weakest since 1999, giving central bank Governor Graeme Wheeler greater scope to cut interest rates this year. The currency slumped.

* Consumers price index rose 0.1 percent in the fourth quarter from a year earlier
* The gain was less than the 0.3 percent median forecast of 13 economists.
* Prices fell 0.5 percent from the third quarter, compared with a median forecast of a 0.2 percent decline.

Benign inflation means there is little impediment to Wheeler cutting the official cash rate further this year if needed after he reduced it four times to a record-low 2.5 percent last year. Traders have increased bets on lower borrowing costs as falling oil prices and anxiety over the global growth outlook threaten to delay the return of the prices gauge to the middle of Wheeler’s 1-3 percent target range.

Today’s data “may not quite be enough to prompt the RBNZ to cut rates at next Thursday’s policy meeting, but it certainly supports our non-consensus view that rates will be cut from 2.5 percent to 2 percent this year,” Paul Dales, chief economist for Australia and New Zealand at Capital Economics, said in an e- mail.

The New Zealand dollar fell more than half a U.S. cent. It bought 64.05 cents at 11:16 a.m. in Wellington from 64.70 cents immediately before the release.

Traders now see about a 70 percent chance of a rate cut by June, according to swaps data compiled by Bloomberg. That’s up from 26 percent at the start of the year. All 17 economists surveyed by Bloomberg expect no change in the cash rate at the next review on Jan. 28, while five predict lower rates by June.

Weakest Since 1999
Annual inflation slowed from a 0.4 percent pace in the third quarter and is the weakest since prices fell in the year ended the third quarter of 1999.

Inflation has been below the 2 percent midpoint of the central bank’s target band since late 2011. Wheeler on Dec. 10 said he expected to return the price gauge to the middle of his target “at current interest-rate settings” although the central bank would reduce borrowing costs if circumstances warranted it.

Despite price weakness, there are signs of a pickup in economic growth. Business confidence rebounded in the fourth quarter, the New Zealand Institute of Economic Research said yesterday. It expects the cash rate to remain unchanged this year.

Return to Target
Today’s data is weaker than the Reserve Bank’s estimate that prices rose 0.4 percent in the fourth quarter from a year earlier. The central bank also forecast Dec. 10 that inflation would accelerate to 1.2 percent in the first quarter of 2016 and reach 2 percent by the final quarter of 2017.

Prices fell for the third time in five quarters, and the decline was the most since the fourth quarter of 2008, Statistics New Zealand said Wednesday.

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