New Zealand 30-year high inflation flags need for more tightening

NEW Zealand’s consumer prices rose at the fastest pace in 3 decades last quarter, underlining the need for the central bank to stay on its hawkish course to contain price pressures without tipping the economy into recession.

The New Zealand dollar slipped after the data showed inflation was not quite as hot as feared though, slightly softening expectations the central bank would again hike rates by 50 basis points in May.

Annual inflation rose 6.9 per cent in the first quarter from 5.9 per cent in the fourth quarter, the fastest since a 7.6 per cent clip in the June quarter of 1990, Statistics New Zealand said in a statement on Thursday (Apr 21).

CPI rose 1.8 per cent in the quarter ending March from a 1.4 per cent rise in the fourth quarter. But the data was below economists’ expectations in a Reuters poll that forecast a 2 per cent rise for the quarter, and an annual rise of 7.1 per cent.

The Reserve Bank of New Zealand (RBNZ) raised interest rates by a hefty 50 basis points to 1.50 per cent last Wednesday, its fourth increase in a row. It has signalled that further hikes will be needed if it wants to get ahead of inflation.

Broad based price rises

Inflation pressures were broad based with domestic price pressures continuing to intensify. Statistics New Zealand data showed rising prices for food, petrol, construction and housing.

“This domestic inflation is the kind that doesn’t go away quickly,” ANZ Bank economists said in a research note. “This continued rise in domestic inflation pressures only reinforces the need for ongoing interest rate rises by the RBNZ.”

ANZ believes higher interest rates will squeeze indebted households this year and engineering a soft landing for the overheated economy could be challenging, especially with the housing market already softening.

The kiwi dollar eased 0.4 per cent to US$0.6772 , from US$0.6804 just before the data hit dealing screens. Two-year swap rates dipped as much as 6 basis points to 3.52 per cent.

With global inflation expected to stay elevated for some time, and prices of commodities and goods affected by supply issues, economists expect RBNZ to hike interest rates again.

“Uncertainty is high but we could still see a 7 per cent annual inflation print delivered in Q2 of this year,” ASB Bank economists wrote in a note. It added the bigger issue for them was not when inflation would peak, but how persistent it was. REUTERS