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PREVIEW: NZ 1Q CPI tipped to rise 0.3%, might not spur a May rate cut

Monday 15th April 2019

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Economists expect inflation remained tepid in the March quarter but are on the fence as to whether it will be enough to spur a May rate cut by the central bank.

Economists expect the consumers price index rose 0.3 percent in the three months ended March 31, for an annual increase of 1.7 percent, according to the median estimate from a poll of economists by Bloomberg. That compares to the Reserve Bank's quarterly projection of 0.2 percent for an annual rise of 1.6 percent. The data is due Wednesday. 

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. 

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

"Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy," it said. 

ANZ is expecting the CPI to lift to 0.3 percent in the March quarter, with annual inflation slipping to 1.7 percent. However, it is not expecting a cut next month. "CPI in line with our expectations would add to the case that a cut in the OCR is not a matter of urgency," said ANZ chief economist Sharon Zollner. 

If it pans out as she expects, the data "buys RBNZ time to be sure that OCR cuts are required. We think the evidence will be unambiguous by August, after one more round of GDP and inflation data." 

Westpac Bank senior economist Michael Gordon expects the CPI to lift 0.2 percent on quarter and annual inflation to be 1.6 percent.

"The CPI release will be crucial ahead of the Reserve Bank’s next Monetary Policy Statement. A result in line with or below expectations would support our forecast of an OCR cut in May," he said. It would take a "substantial upside surprise" to make a May rate cut a "more marginal prospect," he added. 

ASB's senior economist Mark Smith also sees a quarterly rise of 0.2 percent and said that over the medium term, the risks to the inflation outlook remain skewed to the downside. Smith said a slowdown in global growth will be left locally and the latest gross domestic product figures confirmed that the New Zealand economy lost momentum over 2018. The outlook for this year now looks weaker. 

"Spare capacity in the NZ economy will likely dampen medium-term inflationary pressure. We expect the RBNZ to concur with our view and cut the OCR by 50 basis points by the end of 2019," he said. Smith is expecting a 25 basis-point rate cut in May and another in August but said the timing is "fluid." 

(BusinessDesk)

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