New Zealand Inflation Accelerates More Than Forecast; Kiwi Rises

(Bloomberg) -- New Zealand inflation picked up by more than economists expected in the fourth quarter, closing in on the midpoint of the central bank’s target range. The local dollar rose as investors trimmed bets on further interest-rate cuts.

• Consumer prices gained 1.9% from a year earlier, Statistics New Zealand said Friday in Wellington. That compared with 1.5% in the third quarter and exceeded the 1.8% expected by economists
• Prices rose 0.5% from three months earlier; economists tipped 0.4%

Key Insights

• The Reserve Bank of New Zealand in November forecast annual inflation would lift to 1.6% in the fourth quarter and reach the midpoint of its 1-3% target band early this year
• The RBNZ held its official cash rate at a record-low 1% and policy makers signaled the economic outlook would need to deteriorate to justify more monetary stimulus, although they didn’t rule it out
• A lift in business confidence and pledges of more government spending have led investors and economists to question whether another cut will be required
• Consumer prices excluding food, fuel and energy rose 2% from a year earlier, picking up from 1.8% in the third quarter, while other measures of underlying inflation were also firmer. The RBNZ publishes its own core measure later Friday
• Tradables prices rose 0.1% from a year earlier, weighed by lower prices for consumer goods, cars and telecommunication equipment
• Non-tradable prices, which are less influenced by the currency, rose 3.1% from a year earlier led by rents, tobacco, land taxes and the cost of building new houses

Market Reaction

• The New Zealand dollar rose after the report, buying 66.18 U.S. cents at 11:31 a.m. in Wellington. The chance of a quarter-point rate cut at the RBNZ’s next review in February fell to just 4%, according to swaps data
• Kiwibank Chief Economist Jarrod Kerr expects to see the 2% target hit this year but says it is likely to be temporary. “We’re still skeptical inflation will average 2% over the medium term, just as inflation fell well short of the RBNZ’s target midpoint over the last ‘medium’ term,” he said. “In order to maintain momentum into 2021, we suspect the RBNZ will cut the cash rate once more.”

Get More

• RBNZ Says Bank Capital Rules Won’t Hurt Economic Recovery

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Alexandra Veroude

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