NZ CPI Steady At Midpoint Of RBNZ's Target in 1Q

New Zealand CPI Steady At Midpoint Of RBNZ's Target In 1Q

Click here for the full Note and disclosures.

Inflation in New Zealand spiked up in 1Q, owing to higher food costs and a rise in petrol prices, but not quite as much as expected. Consumer prices grew 0.4%q/q (J.P. Morgan and consensus: 0.6%), after falling 0.2% in the previous three months. This left annual inflation at 2.0%, remaining at the midpoint of the RBNZ’s 1%-3% target range for the second straight quarter.

The medium term inflation outlook, however, reaffirms our view that the RBNZ will need to tighten monetary policy in 3Q. By year-end, we anticipate that headline inflation will be above the RBNZ’s 1%-3% target range. The risks are skewed to much higher inflation in 2011 if inflation expectations do not remain anchored, as the RBNZ has assumed, following the introduction of the amended ETS (July 1) and a possible hike to the GST (October 1). With the inflation outlook deteriorating, we maintain that the first rate hike will be delivered in July, with the RBNZ lifting the OCR 25bp from a record low 2.5%. Indeed, leaving the cash rate too low for too long risks the RBNZ having to tighten policy more aggressively that we currently forecast in 2011.

We do expect, however, that the RBNZ, in the statement accompanying the next OCR announcement on April 29, will step away from its current policy guidance. The official guidance indicates the policy stimulus still in place may be removed “around the middle of 2010.” The risk of a June rate hike, in our view, continues to diminish give the slew of weak economic data. The RBNZ will, therefore, likely be concerned that economic conditions will not support a rate hike “around the middle of 2010.” If so, on April 29, Bollard will likely drop the explicit reference to the timing of the first hike, thus allowing greater flexibility when making future policy decisions.

With respect to the details of the CPI print, food prices were up 1.0%q/q in the March quarter, after slumping 2.4% in the previous three months. This owed mainly to higher grocery prices (+1.1%), with prices for milk, cheese, and butter rising significantly over the quarter. Large price increases also were recorded in fruit and vegetables (+2.3%). Thanks to higher petrol prices, prices in the transport group were up 1.1%q/q in 1Q. Petrol prices rose 6.9% over the quarter to an 18-month high. Had petrol prices remained steady in 1Q, the CPI would have recorded no change. Prices in the reception and culture group, and in the education group, posted the largest falls, both declining 1.4% over the quarter.

The non-tradable measure—inflation generated domestically and not influenced by the exchange rate—fell to 2.1%oya from 2.3% in the December quarter. This marked the lowest point since the end of 2001 thanks to “relatively low annual increases for electricity, rentals for housing, the purchases of new housing, and property maintenance services.” From the previous quarter, non-tradable inflation was up 0.5%. This, though, we expect to be the low point in this cycle. Non-tradable inflation will continue to meander higher as the economic recovery strengthens (chart below); this is especially true given that capacity utilization continues to run above its long-run average. The tradable component was up 2.0%oya in 1Q, or 0.1% over the quarter, reflecting higher prices for petrol and second-hand cars.

ENDS

© Scoop Media