New Zealand inflation slows more than forecast in first quarter

NEW Zealand inflation slowed more than economists expected in the first quarter, suggesting price pressures have peaked and the central bank may not need to keep raising interest rates so aggressively.

Annual inflation was 6.7 per cent, slowing from 7.2 per cent in the final quarter of 2022, Statistics New Zealand said on Thursday (Apr 20) in Wellington. Economists expected 6.9 per cent while the Reserve Bank of New Zealand (RBNZ) was picking an acceleration to 7.3 per cent. Consumer prices advanced 1.2 per cent from three months earlier, less than the 1.5 per cent forecast by economists.

The RBNZ has been hiking its Official Cash Rate (OCR) at record pace to tame inflation, this month delivering a bigger-than-expected 50 basis-point increase to 5.25 per cent and signalling it may not be done yet. The softer inflation numbers may not dissuade policymakers from raising the OCR by 25 points at their next meeting on May 24, taking it to a peak of 5.5 per cent.

“It’s a good number for the RBNZ, but the caveat is that it’s very concentrated in a few components, mostly on the tradable side,” said Craig Ebert, senior economist at Bank of New Zealand in Wellington. “The core measures will have slowed a lot less, so there will still be an undercurrent of caution. But it is a step in the right direction.”

New Zealand’s dollar fell towards an April low on the inflation report, losing 0.4 per cent to 61.74 US cents at 11.10 am in Wellington as investors trimmed bets on a further rate increase. They still see a 70 per cent chance of another hike, swaps data show. The yield on 2-year interest rate swaps flipped to an intraday loss, down 2 basis points to 5.2 per cent.

Recession looming

The rapid increase in borrowing costs is projected to drive the country into recession. It may already be in one after the economy contracted in the three months through December. House prices are falling and businesses are downbeat.

At the same time, the RBNZ is concerned that recent severe weather events in the North Island have boosted prices for some goods and services, and that persistently high headline inflation could see inflation expectations stay above its 1-3 per cent target range.

At the last policy review on Apr 5, the RBNZ said demand “continues to significantly outpace the economy’s supply capacity”, thereby maintaining pressure on inflation.

The bank “is expecting to see a continued slowing in domestic demand and a moderation in core inflation and inflation expectations”, it said, adding “the extent of this moderation will determine the direction of future monetary policy.”

SEE ALSO

Australia reaps gains of rate pause as RBNZ hawks see kiwi slide

New Zealand sees record-low house sales as buyers sidelined

Food was the largest contributor to the annual inflation rate, with vegetable prices rising 22 per cent in the 12 months through March, the statistics agency said.

Non-tradables inflation, a closely watched indicator of domestic price pressures, was 1.7 per cent in the quarter and 6.8 per cent in the year — the highest annual rate since the series began in 1999. Tradables inflation, which is influenced by the exchange rate, was 0.7 per cent in the quarter and 6.4 per cent in the year. BLOOMBERG