New Zealand Annual Inflation Holds Below RBNZ's Target Band

  • Consumer prices rose 0.3% in third quarter, more than seen
  • Benign inflation, slow growth signal RBNZ will cut rates

New Zealand inflation held below the bottom of the central bank’s target band for a fourth quarter, supporting expectations Governor Graeme Wheeler will cut interest rates again.

* Consumers price index rose 0.4 percent in the third quarter from a year earlier.
* The gain exceeded the 0.3 percent median forecast of 17 economists.
* Prices increased 0.3 percent from the second quarter, compared with a median forecast of 0.2 percent.

Benign inflation and slowing economic growth add to signs Wheeler will cut the official cash rate to 2.5 percent this year in an effort to return the prices gauge to the middle of his 1-percent-to-3-percent target range. Economists and traders are split on whether Wheeler, who has cut borrowing costs three times since June, will move at his next opportunity on Oct. 29 or wait until December.

“With growth set to slow over 2015 and 2016, we don’t expect non-tradable inflation to pick up meaningfully without further stimulus,” Jane Turner, senior economist at ASB Bank in Auckland, said in an e-mailed note. ASB now expects a pause this month before a rate cut in December, and still sees “some risk of further cuts to the OCR beyond 2.5 percent at some point in 2016,” she said.

The New Zealand dollar fell after initially gaining. It bought 68.38 U.S. cents at 11:53 a.m. in Wellington from 68.50 cents immediately before the release.

Nine of 14 economists surveyed by Bloomberg News before today’s report expected a rate cut on Oct. 29 while traders see an 80 percent chance of no change from 72 percent late yesterday, according to swaps data compiled by Bloomberg.

Easing Likely

Wheeler, who lowered the OCR to 2.75 percent in September, said Wednesday that “some further easing in the OCR seems likely” dependent on the emerging flow of economic data. Still, the Reserve Bank is conscious of the impact of low rates on the housing market and how that feeds into inflation, and will also bear in mind the need to have scope to cut borrowing costs if the global economy slows significantly, he said.

Recent economic data “has been more encouraging,” Wheeler said this week, without providing details. Dairy auction prices have jumped 63 percent from a low in early August and business confidence rose in September for the first time in six months.

The RBNZ expects inflation to accelerate to 1.5 percent in the first quarter of 2016 as the impact of a plunge in gasoline prices in late 2014 passes out of the calculation, according to forecasts in the Sept. 10 monetary policy statement. It is projected to reach 2 percent by the third quarter of 2016.

Annual inflation matched the 0.4 percent pace in the second quarter. It has been below the 2 percent midpoint of the central bank’s target band since late 2011.

Core Inflation

Quarterly inflation slowed from 0.4 percent in the second quarter.

Vehicle relicensing fees fell after a drop in government levies, while prices for medical services dropped after an increase in government subsidies. These falls were offset by the largest jump in local authority land taxes since 2007, while vegetables, gasoline and the cost of building a new home also increased, Statistics New Zealand said.

* Non-tradable inflation, a core measure of prices not influenced by the currency and fuel, was unchanged in the quarter.
* From a year ago, non-tradables prices gained 1.5 percent -- the smallest increase since 2001.
* Tradables prices, which are influenced by currency movements, rose 0.7 percent from the second quarter.
* From a year ago, tradables prices fell 1.2 percent.

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