CPI data sparks rapid reaction

Short-dated New Zealand wholesale interest rates — which have an influence over home mortgages — hit 16-month highs after CPI inflation came in at 3.3 per cent for the June year.

On the back of yesterday’s data, market pricing now suggests there is a 90 per cent chance of a rate hike on August 18, when the Reserve Bank releases its next monetary policy statement.

The New Zealand dollar rallied by about half a per cent to US70.13c before easing back to US70c.

Earlier this week the central bank signalled that its “LSAP” bond buying programme — aimed at suppressing interest rates — would be wound back next week, saying that level of stimulus could now be reduced.

By early afternoon, the one-year swap rate was at 0.8112 per cent — the highest point it has reached since March last year.

The two-year swap rate was at 1.06 per cent — its highest point since February 2020 — while the three-year rate was at 1.292 per cent — the highest it has been since January of that year.

“It [the CPI] is a decent upside surprise compared to expectations,” said Hamish Pepper, fixed income and currency strategist at Harbour Asset Management.

“It further encourages the market to price in August 18 as the time when the Reserve Bank will begin its tightening cycle,” Pepper said.

The official cash rate now sits at a historic low point of 0.25 per cent.

“The details in the CPI are very strong,” said Pepper, a former senior markets analyst at the Reserve Bank.

“The market could have picked holes in it, if had come down to oneoffs.

“But the short story is that it is broad-based, and it is a very high rate of inflation the Reserve Bank will not be comfortable ignoring.”