Inflation accelerates, sending kiwi dollar soaring

Thursday 15th October 2009

New Zealand inflation unexpectedly accelerated in the third quarter, sending the kiwi dollar soaring on speculation Reserve Bank Governor Alan Bollard will bring forward the timing of interest rate increases.

The Consumer Price Index rose 1.3% in the third quarter, for an annual pace of 1.7%, according to Statistics New Zealand. Inflation was expect to pick up to 0.8% in the third quarter, from 0.6% three months earlier, while the annual rate was predicted to slow to 1.2% from 1.9%.

Inflation was “surprisingly strong,” said Khoon Goh, senior markets economist at ANZ National. “The Reserve Bank will not welcome this. There’s a risk we will see an earlier tightening than what was expected.”

The jump in inflation was a reflection of higher-than-expected government charges and the impact of companies raising prices to rebuild margins eroded by recession, he said.

The New Zealand dollar jumped to 74.36 US cents from 74.02 cents immediately before the report and reached as high as 74.47 cents, challenging last week’s 14-month high of 74.50. The kiwi jumped to 81.15 Australian cents from 80.83 cents. The trade-weighted index climbed to 66.62 from 66.34.

The so-called non-tradable component rose 1% in the third quarter, for an annual increase of 3% - higher than the central bank and many economists had expected. The increase reflected gains in electricity prices, local authority charges and beer. Tradables inflation rose 1.6% from the second quarter.

Bollard has said he will keep interest rates “at or below” current levels through until the second half of 2010 though traders have been betting he will go earlier. He will begin raising interest rates in March, based on Overnight Indexed Swaps, which show the OCR 30 basis points higher that month.

By July, the OCR jumped 125 basis points. Imre Speizer, market strategist at Westpac Banking Corp., said as a first step, Bollard may drop the words “or below” from his next monetary policy review on October 29, signaling an easing bias is off the table.

Businesswire.co.nz

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