New Zealand Inflation Surprise Suggests No More RBNZ Rate Cuts
Customers sit outside a bar and restaurant in Wellington, New Zealand. (Photographer Birgit Krippner/Bloomberg)

New Zealand Inflation Surprise Suggests No More RBNZ Rate Cuts

New Zealand inflation was firmer than economists expected in the fourth quarter, adding to signs the central bank may not need to cut interest rates any further.

Consumer prices rose 1.4% from a year earlier, Statistics New Zealand said Friday in Wellington, matching the third-quarter reading. Economists expected inflation to slow to 1.1%. Prices rose 0.5% from three months earlier, exceeding the 0.2% forecast.

The Reserve Bank has projected that inflation will fall below the bottom of its 1-3% target range this year, suggesting monetary policy will remain loose. But the economy has recovered more quickly than expected from last year’s Covid-induced recession, and signs of brewing price pressures make it less likely the central bank will need to ramp up stimulus.

“The medium-term outlook for inflation looks stronger compared to just a few months ago,” said Jarrod Kerr, chief economist at Kiwibank in Auckland, who today took his forecast for more rate cuts off the table. “Monetary conditions are easy enough.”

The New Zealand dollar rose about a quarter of a U.S. cent after the report and bought 72.15 cents at 11:12 a.m. in Wellington.

Investors no longer expect the RBNZ to cut the official cash rate again. Kiwibank joined ANZ Bank New Zealand and Westpac Banking Corp. who have removed negative rates from their projections in recent days as the nation’s V-shaped recovery builds momentum. A business opinion survey published this week showed evidence of rising costs and labor shortages that may fan price pressures.

Read More: V-Shaped Recovery Shifts Focus to RBNZ Exit

The quarterly gain in the consumers’ price index was led by holiday accommodation such as hotel and motel rooms, the statistics agency said. Home construction costs rose the most in two years, while airfares for flights to Australia surged 14% after being omitted from the index in the previous quarter.

Other Details

  • Consumer prices excluding food, fuel and energy rose 2.1% from a year earlier, picking up from 1.7% in the third quarter, while other measures of underlying inflation also increased. The RBNZ publishes its own core measure later Friday
  • Tradables prices rose 0.2% from the previous quarter, when they gained 0.6%
  • Non-tradable prices, which are less influenced by the currency, increased 0.7 from the previous quarter
  • Non-tradables prices rose 2.8% from the year-earlier quarter, accelerating from a 2.6% pace three months ago

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