ADVERTISEMENT

New Zealand’s Sluggish Inflation Points to More RBNZ Stimulus

New Zealand Inflation Unexpectedly Slowed in Third Quarter

New Zealand inflation unexpectedly slowed in the third quarter as fuel prices failed to recover, adding to signs the central bank may need to deliver more stimulus in coming months.

Consumer prices rose 1.4% from a year earlier, Statistics New Zealand said Friday in Wellington. That compared with 1.5% in the second quarter, and was less than the 1.7% expected by economists. Prices rose 0.7% from three months earlier, less that the 0.9% forecast.

Inflation is set to weaken markedly next year as a sluggish economic recovery and rising unemployment exert downward pressure on wages and consumer spending. The Reserve Bank in August projected inflation would slow to just 0.3% by the end of 2021, and has signaled it is prepared to provide more stimulus through negative interest rates if needed. It targets inflation of 1-3%.

The result “was consistent with the RBNZ’s existing stance that the risks to its inflation outlook all lie to the downside, and that extraordinary monetary policy support will be needed for a long time,” said Michael Gordon, senior economist at Westpac Banking Corp. in Auckland. “While the economy has bounced back rapidly from the lockdown, it is still operating well below its pre-Covid trend, which we would expect to put downward pressure on prices.”

The New Zealand dollar fell after the report, buying 66.70 U.S. cents at 11:34 a.m. in Wellington.

RBNZ Governor Adrian Orr this week signaled he is prepared to use a suite of monetary policy tools to avoid seeing deflation take hold in the economy. “The failure of monetary policy is deflation,” Orr said. “I’d prefer to be battling with the quality problem of re-containing high inflation than the real challenge of battling deflation.”

The quarterly gain in prices was led by a 1.2% rise in food costs and a 3.1% increase in local government taxes. Gasoline prices rose just 1.7% after they slumped 12%. in the three months through June.

Other Data

  • Consumer prices excluding food, fuel and energy rose 1.7% from a year earlier, slowing from 1.9% in the second quarter, while other measures of underlying inflation also slowed. The RBNZ publishes its own core measure later Friday
  • Tradables prices rose 0.6% from the previous quarter when they slumped 1.2%
  • Non-tradable prices, which are less influenced by the currency, rose 0.6% from the previous quarter led by rents and local government taxes
  • Non-tradables prices rose 2.6% from the year-earlier quarter, slowing from a 3.1% pace three months ago

©2020 Bloomberg L.P.