New Zealand inflation weaker than RBNZ forecast

by NZ Adviser18 Jul 2016
(Bloomberg) -- New Zealand’s annual inflation accelerated less than economists expected in the second quarter while remaining beneath the range the Reserve Bank targets, giving Governor Graeme Wheeler scope to cut interest rates again. The currency fell.

*Consumers price index rose 0.4 percent in the second quarter from a year earlier* The gain was less than the 0.5 percent median forecast of 16 economists* Prices rose 0.4 percent from the first quarter, when they gained 0.2 percent* Economists expected a 0.5% quarterly increase.

Most economists forecast Wheeler will respond to persistent weak inflation by cutting the official cash rate to 2 percent next month, even as an overheated housing market poses a risk to financial stability. Annual inflation has been less than 1 percent for seven straight quarters and the RBNZ in June forecast it won’t return to the midpoint of its 1-3 percent target range until late next year.

The local dollar dropped after the report. It bought 70.83 U.S. cents at 11:00 a.m. in Wellington from around 71.50 cents immediately before the release.

New Zealand’s trade-weighted currency index fell to 75.69. The gauge reached a 14-month high of 77.24 last week. The RBNZ in June assumed the index would average 71.6 in the third quarter.

Under 1 percent
Annual inflation matched the pace in the first quarter and was weaker than the RBNZ’s June 9 estimate of 0.6 percent. It has been less than 1 percent since the fourth quarter of 2014 and below 2 percent since late 2011.

The RBNZ is preparing an economic update for release later this week which may detail how a recent surge in the New Zealand dollar is hurting import prices and slowing inflation’s revival, economists say. The central bank forecast in June that inflation would accelerate to 1.3 percent in the fourth quarter of 2016 and reach 2 percent by late 2017.

The central bank on June 9 said “further policy easing may be required to ensure that future average inflation settles near the middle of the target range,” while the RBNZ’s bank-bill yield forecasts signaled one further cut. The RBNZ cut the benchmark rate to 2.25 percent in March.

Traders’ expectations of a cut at the next review on Aug. 11 have been volatile. They dived when Deputy Governor Grant Spencer said July 7 the central bank needed to carefully consider risks to financial stability from stoking a housing boom.

Odds of a cut then surged late last week after the RBNZ unexpectedly announced it would release an economic assessment on July 21, which economists tipped could signal a lower inflation track. The update won’t include any review of the cash rate, the central bank said

There was a 66 percent chance of an August rate cut, according to swaps data compiled by Bloomberg early Monday in Wellington.

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