New Zealand inflation accelerated less than economists expected and dairy prices slumped, easing pressure on the central bank to continue raising borrowing costs and sending the Kiwi dollar lower.
The consumer price index rose 1.6 percent in the second quarter from a year earlier, after increasing 1.5 percent in the previous period, Statistics New Zealand said in Wellington today. That’s slower than the 1.8 percent median forecast of 13 economists in a Bloomberg News survey. Prices at yesterday’s GlobalDairyTrade auction fell to the lowest since 2012.
Most economists had forecast Reserve Bank of New Zealand Governor Graeme Wheeler will raise the official cash rate twice more this year as the NZ$40 billion ($35 billion) rebuilding of earthquake-damaged Christchurch and the strongest immigration in 11 years pressure prices. The currency fell as traders bet slower inflation and declining revenues for dairy farmers mean a rate increase on July 24 isn’t guaranteed.
“A July OCR hike may not be quite such a sure thing as previously thought,” Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. in Auckland, said in an e-mailed note. “In combination with the decline in dairy auction prices overnight, today’s data is material for the interest rate outlook.”
The New Zealand dollar fell after the report. It bought 87.26 U.S. cents at 12:39 p.m. in Wellington from 87.67 cents immediately before the release. Its high since becoming freely traded in March 1985 is 88.43 cents in August 2011.
Wheeler on June 12 signaled he wasn’t ready to pause his tightening after raising the official cash rate in March, April and June. The chance of a quarter point increase to 3.5 percent next week fell to 77 percent from 93 percent ahead of the inflation report, according to swaps data compiled by Bloomberg.
The GlobalDairyTrade Price Index fell 8.9 percent in a two-weekly auction yesterday, extending its cumulative decline since early February to 35 percent. Whole milk powder prices plunged 10.9 percent for a 38 percent drop over the past five months.
Falling prices puts pressure on Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, to reduce its forecast milk payment to New Zealand farmers for the 2014-15 season. The company’s initial projection is for it to pay NZ$7 ($6.14) a kilogram of milk solids.
Fonterra may have to revise that forecast down, cutting income for its 10,000 farmer shareholders, said Nathan Penny, an economist at ASB Bank Ltd. in Auckland
“If they were to revise that down to NZ$6.50, which appears reasonable, that would be worth about NZ$800 million to Fonterra farmers,” he said. “Less income in the economy, less demand, means less upward pressure on inflation. It could affect interest rates further out.”
Wheeler was the first central banker from a developed nation to raise official interest rates this year, after they were held at a record-low 2.5 percent for three years to help revive the economy. He’s increasing borrowing costs in an election year, with Prime Minister John Key seeking a third term in a poll set for Sept. 20.
The RBNZ last month projected prices rose 0.3 percent in the second quarter and 1.7 percent from a year earlier. It doesn’t expect the gauge to exceed the 2 percent that Wheeler targets until mid-2015.
Quarterly inflation was fanned by the biggest jump in housing and household utilities prices since the fourth quarter of 2010, the statistics agency said.
Non-tradable inflation, a core measure of prices not influenced by currency fluctuations and fuel, was the slowest in six quarters. The gauge rose 0.4 percent in the quarter from the previous three months as electricity, rents and the cost of building new homes increased. Telecommunication services costs fell.
From a year ago, non-tradables prices rose 2.7 percent, the smallest increase in a year and less than the 2.9 percent gain projected by the RBNZ.
The currency’s 6.2 percent rise this year has limited the cost of imports and helped contain inflation, even as economic growth accelerated. Tradables prices, which are influenced by currency movements, rose 0.2 percent from the first quarter, led by food and international airfares, today’s report showed.
From a year ago, tradables prices gained 0.1 percent, the first annual increase in more than two years. The RBNZ forecast a 0.1 percent decline.