New Zealand Inflation Surges, Fueling RBNZ Rate-Hike Bets

New Zealand inflation surged in the second quarter, breaching the central bank’s target range for the first time in 10 years and fueling bets it will start raising interest rates as soon as next month.

The annual inflation rate jumped to 3.3%, more than double its first-quarter reading of 1.5% and the fastest pace since 2011, Statistics New Zealand said Friday in Wellington. Economists expected 2.7%. Consumer prices advanced 1.3% from three months earlier, exceeding the 0.7% median forecast.

New Zealand’s economy is running hot and stoking inflation, as strong demand allows companies to pass on higher costs and a labor shortage threatens to drive up wages. The Reserve Bank, which seeks to keep inflation around the midpoint of a 1-3% target band, this week unexpectedly announced an end to quantitative easing bond purchases, a likely pre-cursor to rate rises.

New Zealand Inflation Surges, Fueling RBNZ Rate-Hike Bets

“What was most interesting was the broad-based nature of inflation pressure evident in today’s report,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “We now expect the RBNZ to lift the cash rate in August, in what will be the first of at least three hikes from here. We’re likely to see two hikes by year end, and a push to 1% by February.”

The New Zealand dollar rose after the report. It bought 70.18 U.S. cents at 3:39 p.m. in Wellington, up from 69.91 cents this morning. Investors are now pricing a 90% chance that the RBNZ will raise rates next month, up from 70%, and see the cash rate rising twice this year.

Westpac New Zealand economists are now predicting quarter-point hikes in August, October and November.

Consumer prices fell in the second quarter of 2020, accentuating their annual increase this year, and some price pressures stemming from pandemic-disrupted supply chains are expected to be transitory. Still, with strong consumer demand giving firms scope to raise prices, faster inflation could become entrenched.

“We expect annual headline inflation to approach 4% plus by the end of the year, with the risk that high inflation outcomes persist well into 2022,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “A resilient demand back-drop, high inflation, and an economy that is effectively close to full employment necessitates that the RBNZ promptly reduces policy stimulus.”

The RBNZ said today that its gauge of core inflation rose to 2.2% in the second quarter, the highest since 2009.

The quarterly gain in the consumers’ price index was led by higher prices for house construction, used cars and fuel, the statistics agency said.

Other Details

  • Consumer prices excluding food, fuel and energy rose 3.3% from a year earlier, up from 2% in the previous quarter
  • Tradables prices rose 1.7% from the previous quarter, when they gained 0.9%
  • Non-tradable prices, which are less influenced by the currency, increased 1.2% from the previous quarter
  • Non-tradables prices rose 3.3% from a year earlier

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