New Zealand inflation back on track after 2-year undershoot

by NZ Adviser27 Jan 2017
(Bloomberg) -- New Zealand inflation accelerated more than economists forecast in the final quarter of 2016, rising back into the central bank’s target band for the first time in more than two years. 

Key Points
Consumers price index rose 0.4% from 3q, 1.3% from year earlier. Economists’ median estimates were for 0.3% q/q, 1.2% y/y. Annual inflation back within RBNZ’s 1-3% target band for first time since 3q 2014. Inflation has been below RBNZ’s 2% midpoint target for more than five years. 

Reserve Bank Governor Graeme Wheeler cut the official cash rate to a record-low 1.75 percent in November and has said that should be sufficient to return inflation to target. New Zealand’s economy is forecast to grow more than 3 percent this year, with the booming tourism and construction sectors fueling price pressures.

Economist Takeaways
While the data published by Statistics New Zealand Thursday were firmer than expected, ongoing strength in the New Zealand dollar will remain a key downside risk to inflation, ASB chief economist Nick Tuffley said in a note to clients.

“We expect the RBNZ will wait for inflation to return to comfortably within the target band before any rate hikes are considered,” Tuffley said. “We continue to expect the RBNZ to leave the OCR on hold for the foreseeable future.”

Westpac New Zealand chief economist Michael Gordon said he doesn’t think today’s data signal a stronger than assumed impulse for inflation going forward. “With imported inflation remaining modest, headline inflation is still expected to linger in the lower part of the target band for some time,” he said.

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