New Zealand inflation rises in Q4, but unlikely to push RBNZ to hike rates

Jan 27, 1:18 pm
New Zealand_AUDNZD

The quarterly inflation data for New Zealand released on Thursday showed that headline consumer prices increased 0.4% on the quarter ending December 2016. The annual inflation rate in New Zealand rose to 1.3% up from 0.4% in the previous quarter, data from Statistics New Zealand showed on Thursday.

The annual inflation rate of 1.3% was higher than the expectations from the economists polled as well as the RBNZ’s November MPS forecast and moved into the RBNZ’s inflation target band for the first time since the September quarter of 2014.

New Zealand Quarterly Inflation Change: 0.4% (Q4 2016)
New Zealand Quarterly Inflation Change: 0.4% (Q4 2016)

Most of the gains in consumer prices came from higher airfares and fuel prices which gave a mixed picture. Higher airfares are expected to be seasonal meaning that the signs of underlying inflationary pressures remain fragile. Rising fuel costs on account of higher oil prices in the international markets alongside an increase in rents and construction costs were attributed to the surprise increase.

Petrol prices rose 4.1% on the quarter while housing-related prices rose 3.3% on the year in December 2016 while the price of newly built homes rose 6.5% and housing rental prices rose 2% compared to a year ago. A continued rise in fuel prices is expected to push the Q1 annual inflation rate towards 2% according to some analysts which could put inflation tight within the 1% – 3% target band of the RBNZ.

Commenting on the recent inflation data, Jason Attewell from Statistics New Zealand said: “Household price inflation is up from a historical low of 0.1 percent for the December 2015 year.”

Inflation data weighs on RBNZ

The increase in inflation rate has sparked speculation on the RBNZ’s next move with some already starting to talk about a potential rate hike from the RBNZ sometime this year. However, on the same note, the New Zealand dollar has been posting strong gains as well with NZDUSD briefly trading at a two-month high.

The NZD trade-weighted index was seen rising within a few points off the 2016 high, which is likely to keep the RBNZ on edge. Analysts at ANZ Bank said that “given the lift in local retail interest rates that have also contributed to tighter financial conditions, we can see good reasons for NZD strength, but caution that the move may start to fade should the market subscribe to Donald Trump’s bold ambitions.”

NZD Trade Weighted Index, 26/01/2017
NZD Trade Weighted Index, 26/01/2017

However, for the RBNZ to act, inflation will need to be around 2% rather than heading towards the target which is unlikely to happen not before the start of the second quarter in 2017. The RBNZ’s monetary policy meeting is scheduled for February 9th, 2017, and the overnight cash rate remains steady at 1.75%. Therefore, no changes are expected from the RBNZ at this upcoming meeting as the central bank will most likely maintain a cautious tone after years of inflation falling short of the central bank’s target.

Added to this, the strength of the New Zealand dollar is also going to be a concern for the RBNZ, therefore the central bank could be specifically targeting to jawbone the Kiwi dollar lower in the upcoming meetings.

Ahead of the RBNZ’s policy meeting, next week will see the release of the unemployment data for New Zealand and the FOMC meeting where the Fed is expected to keep interest rates steady, but market participants are not ruling out a surprise rate hike in any case.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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