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Inflation tipped to remain tepid in June quarter, add to rate cut case

Monday 15th July 2019

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Inflation  is expected to remain tepid in the June quarter, largely boosted by higher fuel prices, and will likely add to the view that the Reserve Bank is poised to cut rates. 

Economists expect the consumers price index rose 0.6 percent in the three months ended June 30, for an annual increase of 1.7 percent, according to the median estimate from a poll of economists by Bloomberg. The Reserve Bank of the New Zealand is forecasting the same numbers. The data is due Tuesday.

The central bank has a dual mandate to support maximum sustainable employment and keep annual CPI inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent.

The official cash rate is currently at a record low 1.5 percent. In June the bank said a lower cash rate may be needed to meet its objectives, given further deterioration in the outlook for trading-partner growth and subdued domestic growth.

Inflation has remained stubbornly weak and a result below 2 percent will be the ninth consecutive quarter it has been below the mid-point.

The CPI rose 0.1 percent in the March quarter bringing the annual rate of inflation to 1.5 percent, down from a 1.9 percent pace in December.

While petrol prices likely boosted headline inflation, the second-quarter data "should add to the case that inflation pressures have stalled and more is needed from the RBNZ to support the economy and get inflation back to 2 percent,” said ANZ economist Michael Callaghan. His forecasts are in line with the median. 

He notes the non-tradable – domestic – inflation result and core inflation will be “crucial” for the RBNZ. He expects non-tradable inflation to be up 0.3 percent on the quarter, leaving annual non-tradable inflation unchanged at 2.8 percent.

ANZ is currently expecting a 25-basis point cut in both August and November and Callaghan said even a stronger-than-expected non-tradable inflation print is unlikely to sway the RBNZ from an August cut.

On the flip side, a downside surprise would add to the case for the RBNZ to signal even further cuts are needed, he said. 

ASB Senior Economist Mark Smith is also picking inflation of 0.6 percent for the quarter and 1.7 percent on the year but says “risks to our pick are tilted to the downside.”

He says more policy support is needed to keep inflation consistent with the target and “we expect a further 50 bps of OCR cuts in the second half of 2019, with the OCR to end 2019 at 1 percent.” 

Westpac Bank senior economist Michael Gordon also has forecasts in line with those of the central bank.

While “at face value a 0.6 percent increase would be a relatively strong result,” he said higher fuel prices account for about half of it. Price pressures elsewhere are expected to remain modest, he said.   


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