Soft NZ inflation puts acid on RBNZ to cut rates this year

Wednesday 20th January 2016

The lowest annual increase in inflation for 16 years will heap pressure on the Reserve Bank to rethink its stance on interest rates this year as markets start betting on a cut, with one bank economist calling today's inflation undershoot "a very big miss."

The consumers price index fell 0.5 percent in the three months ended Dec. 31, taking the annual increase to just 0.1 percent, according to Statistics New Zealand. Cheaper petrol drove both the quarterly and annual numbers, falling 7 percent in the final three months of 2015 for an annual drop of 8.1 percent. The quarterly decline was steeper than the 0.2 percent the Reserve Bank was picking, and annual inflation has now been below the bank's target band of 1-to-3 percent since September 2014.

"The Reserve Bank was picking -0.2 and we got -0.5. That's a huge difference in the context of this data series and it's a very big miss," said Imre Speizer, senior markets strategist at Westpac Banking Corp in Auckland. "You've got to think the need to cut the OCR (official cash rate) this year now has increased substantially to the point where they might even have to consider doing so at the March MPS (monetary policy statement)."

Central bank governor Graeme Wheeler cut the official cash rate to 2.5 percent in December and indicated rates would stay on hold on the expectation inflation would return to the target band on a weaker New Zealand dollar and as last year’s petrol price declines washed through the data. The RBNZ had predicted the CPI would climb back within the band in the March quarter of this year, but global oil prices have slumped to 12-year lows with a worldwide glut set to continue.

Markets will get an early sense of the Reserve Bank's response at next week's policy review, encompassed in a short statement, before Wheeler's speech to the Canterbury Employers' Chamber of Commerce on Feb. 3, which includes an off-the-record question and answer session with the audience.

Speizer said the central bank will also have been surprised by the detail of the report, with underlying annual inflation, which strips out food and fuel prices, slowing from the prior quarter, and limited pass-through to consumers of a weaker exchange rate.

The New Zealand dollar dropped to 63.92 US cents from 64.70 cents immediately before the release, while two-year swap rates fell 10 basis points to 2.57 percent, the lowest level since December 2012.

Speizer said the kiwi can extend its decline from the kneejerk reaction seen today immediately after the CPI announcement, as investors start "putting on their bets the Reserve Bank will be forced into cutting this year."

BusinessDesk.co.nz

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