Inflation remains below target for sixth quarter

by NZ Adviser18 Apr 2016


New Zealand annual inflation accelerated in the first quarter but remained beneath the range the central bank targets, giving Governor Graeme Wheeler scope to cut interest rates further.

Consumers price index rose 0.4 percent in the first quarter from a year earlier. The gain matched the median forecast of 10 economists. Prices rose 0.2 percent from the fourth quarter, compared with a median forecast of a 0.1 percent increase.

Benign inflation means there’s little impediment to Wheeler cutting the official cash rate if needed after reducing it to a record-low 2.25 percent last month. Traders are betting on lower borrowing costs as falling oil prices and the New Zealand dollar’s 6.5 percent gain the past three months threaten to delay the return of the prices’ gauge to the middle of the Reserve Bank of New Zealand’s 1-3 percent target range.

“Overall, today’s figures are a real mixed bag,” said Mark Smith, senior economist at ANZ Bank New Zealand Ltd. in Auckland. “While the data certainly doesn’t rule out the RBNZ cutting the OCR again next week, we don’t see it as the smoking gun that the market was hoping it would be.”

The local dollar bought 68.89 U.S. cents at 11:44 a.m. in Wellington, little changed from its level just before the data.

Since ’99

Annual inflation accelerated from a 0.1 percent pace in the fourth quarter, which was the weakest since prices fell in the year ended the third quarter of 1999.

Inflation has been below 1 percent for six straight quarters and below 2 percent since late 2011,  prompting Wheeler to take back a series of 2014 interest-rate increases. The central bank on March 10 said “further policy easing may be required to ensure that future average inflation settles near the middle of the target range,” while the central bank’s bank-bill yield forecasts signaled one further cut.

Traders reduced bets of a rate cut at the next review on April 28, with 36 percent tipping a decrease compared with 48 percent on Friday, according to swaps data compiled by Bloomberg at 11.42 a.m. Monday. There’s a 64 percent likelihood of a cut by June.

“This data detracts from the case for an April OCR cut,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland. “The details of the data will constitute a small upside surprise from the RBNZ’s perspective.”

House Prices

Wheeler is also monitoring rising house prices, which could pose a threat to financial stability, and the prospect of economic growth slowing later this year. Just two of 17 economists surveyed by Bloomberg expect a rate cut this month, while 16 forecast lower borrowing costs by June 30.

Today’s data matches the Reserve Bank’s March 10 estimate that prices rose 0.4 percent in the first quarter from a year earlier. The central bank also forecast that inflation would accelerate to 1.1 percent in the fourth quarter of 2016 and reach 2 percent by early 2018.

Prices rose in the quarter after tumbling 0.5 percent in the three months through December, Statistics New Zealand said Monday. Food and cigarettes led the increase. Excluding tobacco, the inflation index fell 0.1 percent in the quarter.

Non-tradable inflation, a core measure of prices not influenced by the currency and fuel, rose 1 percent from the fourth quarter led by cigarettes, rents and home construction costs. Gasoline prices fell 7.7 percent. Excluding gasoline, the CPI rose 0.5 percent in the quarter and gained 0.7 percent from a year earlier, the statistics agency said. From a year ago, non-tradables prices gained 1.6 percent. Tradables prices, which are influenced by currency movements, fell 0.9 percent from the fourth quarter led by gasoline and cheaper airfares. From a year ago, tradables prices fell 1.2 percent.


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