Rate cut likely as CPI stays low
Inflation lifted by a trifling 0.1 per cent in the March quarter, adding weight to predictions the Reserve Bank may choose to cut its official cash rate some time soon. The quarterly move, which took the annual rate to 1.5 per cent for the March year from 1.9 per cent in the December year, was below market expectations and the central bank’s own projections.
At that level, annual inflation was well below the 2 per cent mid-point of the Reserve Bank’s 1 to 3 per cent target range.
Expectations of a lower official cash rate saw the New Zealand dollar drop as low as US66.72c from US67.77c immediately before the Stats NZ release.
ASB Bank continues to pick a rate cut by May.
“Our view is that downside risks to the inflation outlook have grown in recent months and the NZ economy looks increasingly unlikely to be
able to generate sufficient economic momentum that keep CPI inflation comfortably within the 1 to 3 per cent inflation band,” ASB chief economist Nick Tuffley said. “We expect 50 basis points of OCR cuts over 2019, with today’s CPI print raising the odds of a May cut,” he said.
Westpac said that despite petrol prices heading up again in recent weeks, it looks likely that inflation will remain substantially below the 2 per cent midpoint of the target over the remainder of this year.
“The Reserve Bank’s dilemma remains whether the economy can generate enough domestic price pressure to get overall inflation back to 2 per cent on a sustained basis,” Westpac said in a commentary.
The Reserve Bank surprised markets last month when it switched to an overt easing bias from a neutral stand point, and said the most likely direction of the next move in the official cash rate is down from an already record-low 1.75 per cent. Kiwibank senior economist Jeremy Couchman said Stat’s NZ’s inflation report supported the need for a cut in the OCR to 1.50 per cent in May. Not everyone agrees, however. ANZ Bank economist Michael Callaghan said the details of the release add to the case that a cut in the official cash rate “is not a matter of urgency”.
He said the central bank will take some comfort from stronger domestic inflation “with weakness concentrated in the relatively volatile and transitory tradeable component”.
The “core underbelly is more robust than the headline”, BNZ senior economist Doug Steel said. While it is not “crystal clear” what the central bank will do at the May monetary policy meeting, “I don’t think the CPI is a laydown for a rate cut”.
Stats NZ, in its release, said the tradables CPI, which includes goods and services that compete with international rivals, fell 1.3 per cent in the quarter. It was down 0.4 per cent on the year, with lower prices for telecommunication equipment, audiovisual equipment and the purchase of used cars the main factors.
Higher prices for overseas accommodation and meat and poultry offset the decrease.
Non-tradables inflation, which focuses on domestic goods and services, rose a quarterly 1.1 per cent for a 2.8 per cent annual increase. Higher prices for cigarettes and tobacco were a key driver in both the quarterly and annual increase.