Slower Inflation Joins Dairy Drop to Pare Bets on RBNZ Rate Path

New Zealand inflation unexpectedly slowed and dairy prices extended a decline, sending the nation’s currency lower as traders pared bets on the scale of future interest-rate increases.

The annual inflation rate fell to 1.5 percent in the first quarter from 1.6 percent in the final three months of 2013, Statistics New Zealand said in Wellington today. Economists predicted an acceleration to 1.7 percent, according to the median of 14 forecasts in a Bloomberg News survey. Separately, dairy prices fell for a fifth successive auction, extending their decline to 21.9 percent, GlobalDairyTrade said overnight.

Reserve Bank of New Zealand Governor Graeme Wheeler raised the official cash rate from a record low last month and said he may increase the benchmark by a total of 125 basis points this year to contain inflation. Since then, the strengthening kiwi dollar has damped import prices, while falling dairy prices may start to curb export returns.

“Lower-than-expected inflation will obviously reduce the urgency for the Reserve Bank to hike,” said Dominick Stephens, chief economist at Westpac Banking Corp. in Auckland. While Westpac still expects Wheeler to raise rates next week and again in June, “low inflation plus the high exchange rate and falling dairy prices, taken together, have placed a cloud over our forecast for a July hike,” Stephens said.

Market Bets

Markets are now pricing in 111 basis points of RBNZ tightening over the coming year, the least since January and down from 117 points yesterday, interest-rate swaps data compiled by Credit Suisse Group AG show.

The New Zealand dollar fell half a U.S. cent after the inflation report to trade at 85.89 cents at 1:21 p.m. in Wellington. It has gained about 6 percent against the greenback since the end of January on the prospect of higher interest rates.

Consumer prices rose 0.3 percent in the first quarter from the fourth, less than the 0.5 percent increase forecast by economists. Prices of tradables, or imported goods and services, fell 0.7 percent in the quarter.

Non-tradeable prices rose 1.1 percent, pushing the annual rate of non-tradeable inflation to 3 percent, the highest since the third quarter of 2011.

Still, cigarette and tobacco prices rose 10.2 percent in the quarter from the previous three months after an 11.3 percent increase in excise duty in January. Without those gains, the consumer price index would have been flat in comparison with the previous quarter, the statistics agency said.

Inflation Forecasts

Booming dairy exports, immigration and the rebuilding of earthquake-damaged Christchurch are fueling economic growth of more than 3 percent a year. Wheeler raised the benchmark rate by a quarter percentage point to 2.75 percent on March 13 and reviews the rate again on April 24.

The RBNZ last month raised its forecasts for inflation, predicting it would reach the 2 percent midpoint of its 1 percent to 3 percent target range in the second quarter of this year. It estimated consumer prices would gain 0.5 percent in the first quarter for an annual inflation rate of 1.7 percent.

“The currency is roughly 2.5% above where the central bank assumed in its last set of forecasts, so that means its future forecasts for inflation must be lower,” Stephen Toplis, head of research at Bank of New Zealand in Wellington, said before today’s report. “If the currency keeps going up and commodity prices keep going down, then that will unequivocally deter the central bank from raising rates aggressively through this year.”

The GlobalDairyTrade Price Index dropped 2.6 percent in a two-weekly auction overnight. Whole milk powder prices eased 1.6 percent for a 21.8 percent drop over the past 10 weeks. New Zealand’s Fonterra Cooperative Group Ltd. is the world’s biggest dairy exporter.

“We expect the RBNZ will hike in April, and then wait until July before following up,” said Christina Leung, an economist at ASB Bank Ltd. in Auckland. “However, we are mindful that factors such as the swift weakening of dairy prices and stubbornly-high New Zealand dollar are reasons for the RBNZ to be cautious.”

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