N.Z. Consumer Prices Unexpectedly Fall 0.2%; Kiwi Retreats

New Zealand’s consumer prices unexpectedly fell last quarter amid a sluggish economy and cheaper imports, giving the central bank scope to prolong a period of record-low interest rates. The local currency slumped.

Consumer prices declined 0.2 percent from the third quarter, when they rose 0.3 percent, Statistics New Zealand said in Wellington today. The central bank expected a 0.1 percent rise, as did economists according to the median estimate in a Bloomberg News survey of 12 analysts. From a year earlier, prices gained 0.9 percent compared with economists’ prediction for a 1.2 percent advance.

The central bank last month forecast annual inflation will rise slowly in the next two years to 2 percent, the midpoint of its target range. Reserve Bank Governor Graeme Wheeler said Dec. 6 he will be monitoring the housing market, where prices are appreciating, and the reconstruction in earthquake-damaged Christchurch for signs of emerging inflation.

“Absent the rebuild and perkiness across the housing market, the case for a lower cash rate would be solid,” Mark Smith, senior economist at ANZ Bank New Zealand Ltd. in Wellington, said in an e-mailed note. “However, both present risks to the medium-term outlook for inflation. The odds remain tilted toward the next move being up as opposed to down.”

Weaker Kiwi

New Zealand’s dollar bought 83.52 U.S. cents as of 4:10 p.m. in Wellington from 84.17 cents immediately before the report. Traders were pricing in a 15 percent chance of a rate reduction by July, according to swaps data compiled by Bloomberg.

Prices were restrained last year by weak domestic demand and the New Zealand dollar’s 6.6 percent gain, which made imports cheaper.

The Reserve Bank of New Zealand has kept the official cash rate at 2.5 percent since March 2011, and 14 of 16 economists surveyed by Bloomberg News predicted no policy change before June 30.

ASB Bank Ltd. today revised its forecast rate rise to March 2014 from December, saying a pick-up in the economic recovery has been delayed and the currency will stay stronger for longer.

“Though construction costs in Canterbury are clearly rising, the acceleration has tapered off,” said ASB Bank senior economist Jane Turner. “Importantly, spillover effects to the rest of the country are absent. That lack of spillover to wider inflation will give the RBNZ comfort.”

Inflation Target

The central bank on Dec. 6 forecast annual inflation would pick up gradually in 2013, reaching 1.6 percent by the fourth quarter and 2 percent by early 2015. Wheeler signed an agreement with Finance Minister Bill English requiring the bank to keep annual inflation in a 1 percent to 3 percent range, with a focus on the 2 percent midpoint.

New Zealand’s economy grew 2 percent in the year through September, slowing from a 2.5 percent pace through June, as the currency’s gains crimped manufacturing. Still, sluggish growth may be temporary amid signs of a pick-up in rebuilding of earthquake-damaged Christchurch and a rise in consumer confidence in the fourth quarter that may revive domestic demand.

In the fourth quarter, the main influences on inflation were lower vegetable, furniture, telecommunication services and fuel prices, while international airfares and package holiday costs increased, today’s report showed.

Core Prices

Wheeler’s primary focus is on non-tradable inflation, a core measure of prices not influenced by currency fluctuations and fuel.

Non-tradable prices increased 0.3 percent from the third quarter, the statistics agency said. The measure gained 2.5 percent from a year earlier, accelerating from 2.3 percent through September. The central bank forecast a 2.6 percent pace.

Property maintenance, housing rents and medical fees led the rise in non-tradable inflation in the quarter, the agency said. The cost of purchasing a new home, which reflects construction expenses, also gained. The price of phone and Internet services declined.

Prices of so-called tradable items fell 0.7 percent from the third quarter as vegetable, gasoline and dairy prices declined, the report showed. Furniture and appliance prices fell as more retailers applied discounts, the agency said.

From a year earlier, tradable prices dropped 1 percent. The central bank forecast a 0.6 percent annual fall.

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