Inflation shows zero movement
Latest data supports Reserve Bank’s waitand-see approach to the official cash rate
Consumer price inflation did not budge over the June quarter, reinforcing the Reserve Bank’s view that there is no need to start raising interest rates any time soon, say economists.
The zero movement in the CPI meant the annual increase came in at a lower-than-expected 1.7 per cent, after reaching 2.2 per cent in the March quarter.
Economists said the data reinforced the central bank’s waitand-see approach to its official cash rate, which sits at 1.75 per cent, where they said it was likely to remain for the rest of this year and next.
“Certainly the Reserve Bank has been saying that they are in no hurry to do anything,” ANZ senior economist Phil Borkin said. “The market has not necessarily believed them, but this data vindicates the RBNZ’s view.”
Westpac said the data should lead to a substantial rethink in financial markets, which have persistently priced in a hike in the official cash rate by mid-2018.
“Our view is more aligned with the Reserve Bank’s; while inflation has come off its lows, the economy is not in danger of overheating, and we see no need for official cash rate hikes this year or next year,” said Westpac senior economist Michael Gordon.
“In fact, while we have 2019 pencilled in for the first OCR move, our view more generally is that hikes are too far away to be specific about the timing,” Gordon said.
Economists said the most surprising aspect of the data was that nontradeables inflation — reflecting domestic prices outside the import and export sectors — rose by a lowerthan-expected 0.2 per cent in the June quarter.
“That is surprising because the economy has been butting up against capacity pressure and a tightening labour market, so you would have expected to see inflation pressures broadening beyond housing,” said ANZ’s Borkin.
“It will reinforce the Reserve Bank’s cautiousness about not lifting interest rates too early.”
The lower-than-expected inflation data laid to rest any lingering expectations of near-term rate hikes. With those expectations extinguished, the New Zealand dollar fell sharply from US73.3c just before the CPI’s release to US72.60c just after, the currency later recovering to US$73c.
The Reserve Bank is mandated with keeping annual inflation between 1 and 3 per cent, with a focus on the mid-point.
At the June rate review, Reserve Bank governor Graeme Wheeler kept the official cash rate at 1.75 per cent and said the bank viewed a recent
The market has not necessarily believed them, but this data vindicates the RBNZ’s view. Phil Borkin, ANZ senior economist
pickup in inflation as a temporary spike in the tradables sector.
Yesterday’s data, in which weaker fuel prices offset rises in household basics such as rent, food and electricity, has added to that view.
While the continued low official cash rate would keep downward pressure on short-term interest rates, rate hikes around the world — first from the US Federal Reserve and then from the Bank of Canada — would put upward pressure on longer-term interest rates, said ASB chief economist Nick Tuffley.
“The outlook is that our longerterm interest rates are going to be trending up,” Tuffley said.
“Short-term rates will not move much this year and probably not much next year as well, and that’s the part the Reserve Bank is largely anchoring.”