Rate cuts could soon be coming to New Zealand as inflation comes up short

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  • New Zealand CPI grew by just 0.1% in the March quarter, below the 0.3% pace expected by financial markets and 0.2% level forecast by the RBNZ.
  • Higher cigarette, food and rental costs for housing were offset by steep falls in petrol prices and international airfares.
  • Inflation excluding food and petrol prices rose by 1.5% over the year, unchanged from the level seen in the year to December last year.
  • The New Zealand dollar has tumbled following the report, indicating a greater probability the RBNZ could cut official interest rates as soon as next month.

New Zealand inflation remained weak in the March quarter, increasing speculation that the Reserve Bank of New Zealand (RBNZ) may cut official interest rates as soon as next month.

According to data from Statistics New Zealand (StatsNZ), consumer price inflation (CPI) grew by just 0.1% in the three months to March, seeing the annual increase slow to just 1.5%.

The result was below the 0.3% quarterly increased expected by financial markets and 0.2% rise forecast by the RBNZ earlier this year.

The RBNZ’s annual inflation target is between 1% to 3%, so the latest figure sits at the lower end of that range.


StatsNZ said higher alcohol and tobacco prices were largely offset by falls in transportation costs during the quarter.

“Alcohol and tobacco prices rose 4.7%, the largest upward contributor to the quarterly CPI,” it said.

“The rise was influenced by tobacco and cigarette prices… following an annual indexation increase to excise duty on cigarettes and tobacco took place on 1 January 2019.”

Food prices also contributed to the small lift in the headline CPI, rising by 1.2% on the back of higher fruit and vegetable prices. However, that was largely overridden by steep declines in petrol and international airfare costs.

“These rises were offset by a fall in transport prices which fell by 3.7%, led by petrol which fell 7% and international airfares that declined 12%, Stats NZ said.

Reflecting the movements in individual categories, Stats NZ said tradable prices — those largely impacted by offshore factors — slumped by 1.3% during the quarter, adding to the 0.4% drop seen in the final three months of 2018. Over the year, tradable prices fell by 0.4%.

In contrast, non-tradable inflation jumped by 1.1% during the quarter, reflecting higher costs for cigarettes and tobacco products along with firmer rents for housing. Over the year, non-tradable prices rose by 2.8%.

Of more interest to the RBNZ in terms of monetary policy settings, underlying inflation rose by 1.5% from a year earlier, according to Capital Economics, the same level seen in the year to December last year.

This measure excludes food and fuel prices — often volatile from quarter to quarter — to provide a better indication of underlying trends in inflation. The RBNZ will release its own measure of underlying inflationary pressures — known as its sectoral factor model — at 3pm Wellington time on Wednesday.

Despite the unchanged underlying reading, the undershoot on headline inflation has seen the New Zealand dollar tumble against the greenback and Australian dollar, reflecting a greater chance of a near-term rate rate cut being delivered by the RBNZ.

Last month, the RBNZ introduced an explicit easing bias on the outlook for official interest rates, implying it’s likely to cut its overnight cash rate (OCR) again.

“Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,” the bank said.

It retained the view that inflation was still likely to move back towards the midpoint of its target, although it acknowledged “the balance of risks to this outlook has shifted to the downside”.

“The 0.1% rise in inflation in Q1 increases the pressure on the Reserve Bank to cut rates at their next meeting in May,” said Ben Udy, Economist at Capital Economics.

“We think GDP growth will remain below its potential rate and underlying inflation will be below midpoint of the RBNZ’s 1-3% target for the foreseeable future.

“That’s why we think the RBNZ will cut rates twice this year in an attempt to kick-start the economy, with the first cut taking place at its next meeting in May.”

Similar sentiment was also expressed by Michael Gordon, Senior Economist at Westpac Bank.

“It looks likely that inflation will remain substantially below the 2% midpoint of the target over the remainder of this year,” he said. “The RBNZ’s dilemma remains whether the economy can generate enough domestic price pressure to get overall inflation back to 2% on a sustained basis.”

Like Capital Economics, Westpac is forecasting the RBNZ will cut official interest rates by 25 basis points when it next meets in early May.

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