Pipeline price pressures eased sharply in NZ Q1

Pipeline price pressures eased sharply in New Zealand in 1Q
Input prices fell most on record in 1Q
• Output prices fell for first time in two years
• RBNZ has plenty of scope to ease monetary policy

Pipeline price pressures eased dramatically in New Zealand in the first three months of the year. Producer input prices tumbled 2.5%q/q in 1Q, the largest decline on record, after falling 2.2% in 4Q. Output prices were down 1.4%q/q in the March quarter, also a record fall, reversing the 1.4% gain in the previous three months.

The main driver of the fall in input prices was the fuel wholesaling sector, owing to lower crude prices; this drove a 13%q/q slide in the wholesale trade component in 1Q. Lower prices for aviation fuel also pushed air transport prices lower (-14%q/q). The drop in output prices stemmed mainly from lower prices in the dairy manufacturing index – the 24%q/q fall marked the largest decline since 1994 - as export prices for milk, butter, and cheese declined. The second largest contributor to the fall in output prices came from the wholesale trade index, which fell 4%q/q, again owing to lower crude prices.

In terms of the policy outlook, if anything, today’s PPI report reaffirms our view that the RBNZ has plenty of scope to ease policy further. We anticipate a 25bp rate cut on June 11, which will take the OCR down to 2.25%, our terminal cash rate forecast for this cycle. The June decision will be a close call, however. On the one hand, there is the risk that the RBNZ sits on the sidelines, possibly wanting to preserve monetary policy power for use at a later date - the case can still be made for the RBNZ to wait until 2H09, when the unemployment rate is soaring, before delivering further policy support. On the other hand, however, with inflation pressures easing, the weakness in private consumption (as indicated by data on Friday showing a record drop in retail volumes in 1Q), and the falling terms of trade, further policy easing, in our view, is warranted.

Pipeline price pressures eased sharply in New Zealand in 1Q 18May09 (PDF)

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