Kiwi Slumps After New Zealand Inflation Slows More Than Forecast

(Bloomberg) -- New Zealand inflation slowed more than economists forecast in the first quarter, prompting traders to increase bets on an interest-rate cut and sending the local dollar plunging by more than one U.S. cent.

Consumer prices gained 1.5 percent from a year earlier, Statistics New Zealand said Wednesday in Wellington, slower than the 1.9 percent pace in the fourth quarter and the 1.7 percent median forecast of economists. Prices rose 0.1 percent from three months earlier, less than the 0.3 percent expected.

Inflation was also slower than the Reserve Bank projected, adding to signs the central bank may be poised to cut the official cash rate as soon as next month. Governor Adrian Orr last month said the next move in interest rates is more likely to be down, citing a weaker global economic outlook and reduced momentum in domestic spending.

“The inflation starting point is low and we believe the weaker outlook for the New Zealand economy will likely dampen medium-term inflationary pressure,’’ said Nick Tuffley, chief economist at ASB Bank in Auckland. “We have penciled in 25 basis-point OCR cuts in May and August and today’s data increase the odds of a May cut.’’

The New Zealand dollar fell more than one U.S. cent after the data and bought 67.08 cents at 11:37 a.m. in Wellington, from 67.74 cents before the report. Two-year swaps prices fell 10 basis points to 1.62 percent.

The chance of a rate cut in May rose to 60 percent from 24 percent, while a reduction by August is now fully priced in, according to swaps data.

Kiwi Slumps After New Zealand Inflation Slows More Than Forecast

The RBNZ in February forecast annual inflation would slow to 1.6 percent in the first quarter and stay below the midpoint of its 1-3 percent target until late 2020. With business confidence weakening, there’s increasing concern that the economy lacks the momentum to get inflation back to 2 percent, which has prompted a majority of economists to now forecast rate cuts in 2019.

In the quarter, prices were driven higher by tobacco taxes and food, offset by a slump in gasoline, the statistics agency said. Annual inflation excluding food, fuel and energy was steady at 1.5 percent, adding to evidence that underlying inflation pressures remain benign. The RBNZ publishes its own core inflation measures later Wednesday.

“The Reserve Bank can look through today’s result to some degree –- the surprise was largely in tradables prices, which are more volatile and tend to be more transitory,” said Michael Gordon, senior economist at Westpac Banking Corp. in Auckland. “Nevertheless, even with petrol prices heading up again in recent weeks, it looks likely that inflation will remain substantially below the 2 percent midpoint of the target over the remainder of this year.”

Non-tradable prices, which aren’t influenced by the currency, rose 2.8 percent from a year earlier -- the most since the first quarter of 2014. Tradable prices fell 0.4 percent from a year earlier.

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