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New Zealand inflation subdued, no bar to rate cut

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New Zealand inflation cooled slightly in the third quarter, but not by as much as expected, while a measure of domestically generated price pressure came in flat, a benign outcome that should give the central bank room to cut interest rates if needed.

[WELLINGTON] New Zealand inflation cooled slightly in the third quarter, but not by as much as expected, while a measure of domestically generated price pressure came in flat, a benign outcome that should give the central bank room to cut interest rates if needed.

The consumer price index (CPI) rose 0.3 per cent in the third quarter, taking the annual rate to 0.4 per cent, data from Statistics New Zealand showed on Friday.

That was well below the Reserve Bank of New Zealand's (RBNZ) 1 to 3 per cent target band.

Non-tradable CPI was flat for the quarter, its smallest movement in 14 years. Annual non-tradable inflation was 1.5 per cent - the smallest annual increase since the December 2001 quarter when it also increased 1.5 per cent.

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It includes utilities provided locally such as electricity and personal services such as medical treatment.

"The standout feature is the slowdown in non-tradable inflation. Domestically-generated inflation has fallen away at a very sharp pace," said Michael Turner, strategist at RBC Capital Markets.

"Even when the economy was travelling well through 2014 it couldn't generate much inflation and now it's slowing. We still think they will cut rates later this month," he said, referring to the RBNZ's meeting to decide whether to change the official cash rate (OCR) on Oct 29.

The RBNZ cut the cash rate to 2.75 per cent at its last meeting in September, the third easing in as many policy reviews to counter slowing economic growth. Some analysts suspect it may pause at this month's meeting.

A Reuters poll had forecast a quarterly rise for CPI of 0.2 per cent and an annual rate of 0.3 per cent. In its September monetary policy statement, the RBNZ had forecast an increase of 0.3 per cent on the quarter and a 0.2 per cent rise for annual CPI.

RBNZ Governor Graeme Wheeler this week noted that recent economic indicators have been more encouraging. He reiterated that "some further easing in the OCR seems likely but this will continue to depend on the emerging flow of economic data." The rise in CPI was led by vegetables, which had a seasonal price increase, rising rents, particularly in Auckland, and local authority rates. Private transport and dairy prices decreased.

The New Zealand dollar jumped a quarter of a US cent in reaction to the forecast-beating result and reached a session high of US$0.6897, retesting a 3-1/2 month peak set overnight. It has since returned to US$0.6855, almost flat on the day.

REUTERS

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