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Economists split on whether tepid CPI points to a May rate cut

Wednesday 17th April 2019

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Economists are split as to whether today's tepid inflation data increases the odds for a May rate cut.

The consumers price index 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, Stats NZ said.

Economists had expected the CPI rose 0.3 percent in the three months ended March 31, for an annual increase of 1.7 percent. The Reserve Bank had tipped a 0.2 percent lift and an annual rise of 1.6 percent.

The New Zealand dollar dropped as low as 66.72 US cents from 67.77 cents immediately before the release. It was recently at 67.27 cents. The market moved to price a 65 percent  chance of a rate cut in May, up from around a 30 percent chance before the announcement. 

The central bank has a dual mandate to support maximum sustainable employment and keep annual inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent. The bank surprised markets last month when it switched to an overt easing bias and said the most likely direction of the next move in the official cash rate is down from an already record-low 1.75 percent. 

"Today’s report supports the need for a cut in the OCR to 1.50 percent in May," said Kiwibank senior economist Jeremy Couchman. 

"The inflation starting point is low and we believe the weaker outlook for the NZ economy will likely dampen medium-term inflationary pressure, ASB Bank chief economist Nick Tuffley said. "We expect the RBNZ to concur with our view and cut the OCR by 50bps by the end of 2019.  We have pencilled in 25bps OCR cuts in May and August and today’s data increase the odds of a May cut." 

Not everyone agrees, however. 

ANZ Bank economist Michael Callaghan said the details of the release add to the case that a cut in the official cash rate "is not a matter of urgency." He said the central bank will take some comfort from stronger domestic inflation "with weakness concentrated in the relatively volatile and transitory tradable component." 

The tradables CPI, which includes goods and services that compete with international rivals, fell 1.3 percent in the quarter. It was down 0.4 percent on the year, with lower prices for telecommunication equipment, audio-visual equipment and the purchase of used cars the main factors. Higher prices for overseas accommodation and meat and poultry offset the decrease.

Non-tradables inflation, which focuses on domestic goods and services, rose a quarterly 1.1 percent for a 2.8 percent annual increase. Higher prices for cigarettes and tobacco were a key driver in both the quarterly and annual increase.

The "core underbelly is more robust than the headline," BNZ senior economist Doug Steel said. While it's not "crystal clear" what the central bank will do at the May monetary policy meeting, "I don't think the CPI is a laydown for a rate cut." 

(BusinessDesk)



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