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Stronger-than-expected inflation won't deter November rate cut - economists

Wednesday 16th October 2019

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New Zealand’s stronger-than-expected third-quarter inflation won’t deter the Reserve Bank from cutting interest rates again with most economists expecting a 25-basis point rate cut in November.

The consumers price index increased 0.7 percent in the September quarter, bringing the annual rate of inflation to 1.5 percent, slowing from a 1.7 percent pace in June, Stats NZ said.  

The annual pace of non-tradeable inflation, which focuses on domestic goods and services that don't compete with imports, accelerated to 3.2 percent from 2.8 percent in the June quarter. That was the biggest annual increase since September 2011 when the GST rate increased to 15 percent from 12.5 percent.

Consumer prices for goods and services that compete with international rivals - non-tradeable inflation - fell 0.7 percent from a year earlier, having increased at an annual pace of 0.1 percent in the June period.

Economists had tipped consumer prices to lift 0.6 percent in the three-month period, for an annual increase of 1.4 percent, according to the median estimate from a poll by Bloomberg. The Reserve Bank was forecasting a 0.5 percent increase and an annual rise of 1.3 percent.

The central bank has a dual mandate to support maximum sustainable employment and keep annual inflation between 1-3 percent over the medium term, with a focus on the mid-point of 2 percent. Inflation has been below 2 percent since the first quarter of 2017 when it briefly touched 2.2 percent. Prior to that, the last time it was above 2 percent was eight years ago.

ANZ Bank economist Michael Callaghan said that while the central bank may see a “glimmer of hope” in the domestic inflation reading, it would have to weigh up a higher-than-expected starting point against a weaker outlook for domestic growth.

“The RBNZ is forward-looking, and inflation is a lagging indicator, so the weaker growth outlook will win out,” said Callaghan. ANZ economists still expect rate cuts in November, February and May, taking the official cash rate down to 0.25 percent.

ASB Bank economist Mark Smith noted the inflation starting point was firmer and the central bank appeared confident the economy would respond to the current low rates.

“However, we expect increasing spare capacity in the NZ labour market and economy to dampen subsequent medium-term inflationary pressure."  ASB is still expecting 25-basis point rate cuts in November and February, taking the cash rate to 0.5 percent.

Kiwibank chief economist Jarrod Kerr also said a 25-basis cut in November was still likely. Today’s stronger-than-expected number “just reduces the case that the RBNZ needs to put all 50 basis points of stimulus through in November as market pricing has recently suggested was a possibility – albeit a slim one,” he said.

Ben Udy, Australia and New Zealand economist for Capital Economics, was an outlier and said he expects the central bank to stay on hold in November before cutting in February.

Given that the RBNZ had expected a sharper easing in headline inflation to 1.3 percent and that underlying inflation actually strengthened, today’s data supports Capital Economics’ view that the RBNZ will remain on hold in November, he said.

However, weaker economic growth will result in rising unemployment, and weigh on non-tradeable inflation.

“We forecast core inflation to fall further below the midpoint of the RBNZ’s target next year, prompting the bank to cut to 0.5 percent by the middle of 2020," he said.

The central bank is due to publish its next monetary policy statement on Nov. 13. In September, it said it needed to keep the official cash rate at low levels to lift inflation to the mid-point of the target range, and ensure employment remains around its maximum sustainable level, with the unemployment rate at an 11-year low. 

"There remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives," it said last month. 


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