Higher inflation lowers odds of rate cut
The odds of the next move in the official cash rate being a cut appear to be receding after data out yesterday showed inflation came in higher than expected over the September quarter.
Stats NZ said the consumer price index rose by 0.9 per cent over the quarter and by 1.9 per cent over the year — driven mostly by higher fuel prices and taxes on petrol.
Market expectations were for gains of 0.7 per cent for the quarter and 1.7 per cent for the year.
The Reserve Bank has set its official cash rate at 1.75 per cent but has left the door open for the next move being either a rise or a fall.
Economists said the central bank was likely to “look through” the oil price and tax gains and treat them as one-offs.
Aside from fuel prices, the lower New Zealand dollar is starting to lift prices, Westpac said.
“Mainly what we are seeing is rising petrol prices and that should be of little consequence to the Reserve Bank,” Westpac chief economist Dominick Stephens said.
But he said data, such as a stronger-than-expected GDP outcome for the June quarter, pointed to stronger underlying inflation.
“Everything, bar the business confidence surveys, is turning out a little bit stronger than the Reserve Bank might have expected, and I think that reduces the risk that they would want to pull the trigger and reduce the official cash rate,” Stephens said.
Kiwibank economists said that, for now, the Reserve Bank can still claim that much of the recent rise in inflation pressure is coming from “cost-push” inflation factors that can be treated as one-offs.
“With business confidence still casting a shadow on the economy, there remains the risk that internally generated inflation peters out,” Kiwibank said in a commentary.
“However, as the bank has drummed home, price setting behaviour is being more driven by actual inflation,” Kiwibank said.
“We believe that ultimately the Reserve Bank will be forced to begin gradually hiking the official cash rate sooner than is currently signalled.”
ANZ senior macro strategist Phil Borkin said the Reserve Bank’s focus is on the medium term, and would see yesterday’s numbers as transitory.
“It does not really change our view of whether there will be rate cut or not,” he said. “It’s not a game changer for the Reserve Bank,” he said. ANZ said patchy data, alongside global uncertainties, suggested risks to the Reserve Bank’s medium-term activity and inflation forecasts were skewed to the downside.
ASB chief economist Nick Tuffley said that, aside from fuel prices, the lower New Zealand dollar is starting to lift prices of tradeable goods and non-tradables inflation has picked up by more than the RBNZ expected. Tuffley expects the bank to leave the official cash rate on hold until early 2020.
At its last monetary policy statement, the Reserve Bank said there may be one-off price changes from global oil prices, a lower exchange rate, and petrol excise tax rises.
“We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.”
The central bank is mandated with keeping annual inflation between 1 and 3 per cent over the medium term, focusing on the midpoint. The central bank said it expects to keep the rate level through 2019 and into 2020.
The data saw the New Zealand dollar spike up to US65.9c from US65.5c just before the data. Late in the day, the currency had lost most of its gains.