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NZ third quarter inflation higher than expected on housing-related costs

Tuesday 17th October 2017

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New Zealand consumer prices gained more than expected in the third quarter as housing-related costs continued to increase, while dwelling insurance spiked on a levy hike, however, economists aren't expecting any change in the central bank's outlook for interest rates.  

The consumers price index rose 0.5 in the three months ended Sept. 30 while annual inflation was 1.9 percent, Statistics New Zealand said. Economists had expected inflation to be 0.4 percent in the three months ended Sept. 30, for an annual rate of 1.8 percent, according to the median in a poll of 13 economists surveyed by Bloomberg. That compares to the central bank’s projection of inflation of 0.2 percent in the third quarter for an annual rise of 1.6 percent.

The Reserve Bank is mandated with keeping annual inflation between 1-and-3 percent, with a focus on the mid-point. Acting Reserve Bank governor Grant Spencer kept the official cash rate at 1.75 percent as widely expected at the September review and signalled no change on the immediate horizon. Rates have been on hold since November last year and the central bank’s forecasts show it does not expect to lift rates until September 2019 at the earliest.

"Although the RBNZ will be relieved to see inflation lift over the quarter, we think it will continue to exercise caution," ASB Bank chief economist Nick Tuffley said. 

ANZ Bank New Zealand senior economist Phil Borkin said there are "tentative signs" of domestic price pressures building, however, "with core inflation measures broadly stable, and future inflation signals mixed, we see few implications for the monetary policy outlook," he said. 

Paul Dales, chief Australia and New Zealand economist for Capital Economists, said modest strengthening in headline and underlying price pressures in the third quarter don’t dramatically alter the outlook for interest rates: "At the margin they suggest that rates may rise a little bit earlier than the RBNZ’s current suggestion of sometime late in 2019." 

New Zealand's two-year swap rate rose about 3 basis points to 2.20 percent and 10-year swaps increased the same to 3.21 percent.

Today's figures showed housing-related prices were behind much of the lift, up 1 percent in the quarter and 3 percent annually. Within that, dwelling insurance rose 6.1 percent in the quarter and was up 12 percent on the year.

Tim Grafton, chief executive of the  Insurance Council of New Zealand, said the lift was largely due to a 40 percent increase in the fire service levy that took place on July 1. 

"That will have fed into the September 30 quarter and probably explains a good part of that 6 percent increase," he said. Earlier this year the government said people with house and contents insurance will see their levy increase by approximately 70 cents per week. 

Regarding the annual lift, he said other sources of pressure include resource constraints in the building sector and rising house prices as the people will be adjusting the sum insured higher to reflect increased costs of replacing the dwelling. 

"There has been a significant loss due to methamphetamine contamination of some properties, particularly rental properties. That has been a factor that will have influenced premiums to some extents," said Grafton. While the annual time frame includes the Kaikoura quake, Grafton said he didn't think that it was driving up the price in the period. 

Looking ahead, he said dwelling insurance inflation is set to push higher as there will be a 33 percent increase in the Earthquake Commission levy on Nov. 1. Under the changes, the EQC's premium will be raised to 20 cents per $100 of cover, from 15 cents per $100 of cover, according to the budget announcement. 

The Stats NZ figures show prices for new housing rose 1.1 percent in the June quarter for an annual increase of 5.4 percent. Actual rentals for housing rose 0.6 percent in the quarter and were up 2.2 percent on the year. Rentals increased 1 percent in Wellington and 0.5 percent in Auckland and fell 0.2 percent in Canterbury, Stats NZ said. It was the largest increase in Wellington rents since December 2008.

Local body rates rose a quarterly 3.5 percent and were up 3.7 percent on the year. Local authorities set their rates annually and these mainly show in the September quarter’s data, Stats NZ said.

The kiwi dollar rose above 72 US cents for the first time since Oct. 4 but eased back to 71.83 cents from 71.75 cents immediately before the release. 


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