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Swap rates fall as tepid NZ inflation cools case for rate hike

Tuesday 17th July 2012

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The New Zealand dollar and swap rates fell as the nation's tepid inflation figures may push out the timing of future interest rate hikes as household demand remains weak.

The two-year swap rate fell 3.3 basis points to a month-low 2.58 percent and the kiwi dollar declined to 79.64 US cents from 79.74 cents after government figures showed the consumers price index increased 0.3 percent in the three months ended June 30.

That was lower than the 0.5 percent pace forecast by a Reuters survey of economists, which would have been unchanged from the first quarter. The annual pace of inflation was 1 percent, slower than the 1.1 percent forecast, and at the bottom of the Reserve Bank's target band of 1 percent and 3 percent.

"Given the low level of headline inflation, we will review our OCR forecast with an eye to a later start date for hikes," Westpac Banking chief economist Dominick Stephens and economist Michael Gordon said in a note. "Our current forecast is for a series of OCR hikes beginning in March 2013."

Traders are betting the Reserve Bank will cut the official cash rate in the next 12 months, based on the Overnight Interest Swap curve, which shows 21 basis points of cuts priced in, according to Reuters data. They are seeing a chance that the central bank stands ready to act to stimulate growth should Europe's sovereign debt woes escalate and spread to the rest of the world.

ASB economist Christina Leung said the tepid inflation reflects "overall subdued household demand" and means there's little reason for the central bank to hike rates.

"The dominant factor would still be the euro-zone that would drive expectations of a rate cut," she said.

Westpac's Stephens and Gordon said the biggest surprise was the lack of housing-related inflation, which had been showing warning signs of getting out of hand in the first quarter.

"This quarter's data assuaged those concerns," they said.

The communication group showed the biggest quarterly drop in consumer prices, falling 2.5 percent. That was led by a 3.8 percent decline in the price of telecommunication equipment and a 2.5 percent fall in the price of services. The price of audio-visual and computing equipment fell 3.2 percent in the quarter.

"This reflected increased data caps for broadband plans and better-value cell phone services," Statistics New Zealand said in its report.

On an annual basis, communication group prices were down 9.5 percent, led by a 28 percent fall in the price of telecommunication equipment.

Higher electricity prices and rents pushed up the housing and household utilities group, which rose 1 percent in the quarter. Electricity prices rose 4.5 percent in the quarter, and were "influenced by widespread electricity tariff increases."

Petrol prices rose 0.4 percent in the quarter to their highest recorded level. Still, prices fell late in May and continued to decline through June. Petrol prices rose at an annual rate of just 0.2 percent.

"If petrol prices remained at their end-of-June level throughout the September quarter, this would shave 0.4 of a percentage point off the September quarter CPI movement," Statistics New Zealand said.

Non-tradable inflation slowed to quarterly pace of 0.5 percent and was 2.4 percent on an annual basis.

Tradable inflation, which covers items that are open to foreign competition, rose at a quarterly pace of 0.1 percent after shrinking 0.4 percent in the first three months of the year. Annual tradable consumer prices shrank 1.1 percent from the same quarter a year earlier.

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