Data Flash (New Zealand)
Key points
The CPI rose by 1.2% qoq in Q4, lifting the annual rate of inflation from 3.0% to 4.0%.
The outcome was significantly above the average market expectation of 0.8% and the RBNZ forecast of 1.0%.
Key contributors to the result were items sensitive to the exchange rate and world commodity prices: airfares
(contribution: +0.16%), food (+0.25%), household appliances and furnishings (+0.15%), stationery, books and newspapers
(+0.05%), cars (+0.04%). On the non-tradeables front, the rise in construction costs (+0.9%, contribution +0.09%) was
surprising, considering the significant contraction in residential construction activity.
There were no notable downside contributions to the Q4 result.
Overall, tradeables inflation was 1.6%, lifting the annual rate from 4.1% to 5.6%. Non-tradeables inflation was 0.7%
(annual: 2.4%).
The weighted median, which provides a better assessment of the underlying tendency of inflation, rose by 0.8%, which
lifted the annual rate from 1.2% to 1.9%.
Looking ahead, we expect the Q1 CPI result to be -0.1% qoq, with a significant fall in state house rentals and petrol
prices (combined contribution estimated at around -1.0%) likely to offset residual price pressure related to NZD
weakness. The recent rebound in the NZD will limit that residual pass-through. A weak CPI result for Q1 would lower the
annual rate of inflation to 3.1%, with a continued downward trend to around 2.0% expected over the remainder of this
year.
New Zealand has no official core inflation measure. However, defining the core rate of inflation as CPI minus petrol
prices, tobacco taxes and state house rentals, shows an increase from 1.4% over the year to September to 2.5% over the
year to December. If our CPI forecast for Q1 proves correct, it implies a further rise to 2.8%.
The Q4 result makes it very unlikely that the RBNZ will ease policy in the near future, as currently priced by the
market. We expect the OCR to remain unchanged at 6.5% until Q4. At that point, we expect the RBNZ to raise the OCR by
25bps, consistent with a continued domestic recovery and an improvement in the world economy outlook.
Commentary
Today's result exceeded RBNZ expectations (+1.0%) by a small margin and showed broadly based inflation pressure, as well
as a rise in core inflation. That suggests that expectations of the RBNZ following other central banks in the easing
cycle are premature.
RBNZ policy is focused on the medium term outlook for underlying inflation. The Bank's approach is to tighten when
inflation threatens to deviate from the mid-point of the 0-3% target range on a sustained basis. Conversely, an easing
will be contemplated if inflation is on a persistent downward trend, taking the annual rate below 1.5%.
While the Bank will revise its real economy forecasts in the light of the more pronounced global economic slowdown that
is currently being experienced, it is likely to project a gradual recovery of the world economy commencing in the second
half of this year. Furthermore, with the domestic economy showing signs of improvement - business and consumer
confidence recovered strongly before Christmas - it is likely that the RBNZ will forecast continued stress on domestic
resources, the labour market in particular.
Such an outlook is unlikely to be consistent with medium-term inflation falling below 1.5% on a sustained basis,
suggesting that there is little chance that the Bank will follow the markets' expectation and ease in the near future.
We expect the RBNZ, in its statement following the 24 January cash rate review, to refer to the changed world outlook
and the surprisingly strong rebound in the NZD, which would make the tightening steps foreshadowed in December (OCR to
7.5% by early 2002) less likely.
Such a statement would be consistent with our view that the cash rate will remain unchanged at 6.5% over most of this
year.
Should the Bank mention the possibility of an easing, we would expect that to be in the context of a risk scenario which
includes a significantly weaker world growth outlook than currently being contemplated by most forecasters. Therefore,
while the Bank may sound significantly less hawkish on 24 January than it did in December, it will not be dovish enough
for the market, which suggests that the risk distribution around going short the front end of the NZ curve is one-sided.