NZ CPI rose 0.2% in June qtr from March quarter; up 0.7% from year ago; lower than consensus forecast of 0.3% for qtr and 0.8% for year

By Bernard Hickey

Statistics NZ has reported New Zealand's Consumer Price Index rose 0.2% in the June quarter from the March quarter and was 0.7% higher in the June quarter than in the same quarter a year ago. This was a touch weaker than the economist consensus forecast for inflation in the quarter of 0.3% and annual inflation of 0.7%.

This will be seen as reducing some of the pressure for the Reserve Bank to move quickly to put up the Official Cash Rate from its current record low 2.5%. This was the fourth consecutive annual inflation figure below the Reserve Bank's target band of 1-3% and the lowest annual inflation figure since 1999.

Statistics NZ said electricity price inflation of 2.6% in the quarter and housing related inflation were offset by lower petrol and car prices, driven in large part by the strength of the New Zealand dollar in the months leading up to the June quarter. The currency has fallen 10% vs the US$ since mid April. The New Zealand dollar fell to 77.9 USc from 78.2 USc immediately before the release of the data, but had rebounded by mid afternoon.

"The purchase of newly built houses (up 1.7%) and housing rentals (up 0.4%) were influenced by rises in both the North and South islands," Statistics NZ said. "The strongest of these housing-related price rises were in Canterbury, with purchase of newly built houses up 2.9% and housing rentals up 1.1%. Dwelling insurance (up 9.9%) also rose," it said.

Petrol prices fell 2.5% in the June 2013 quarter, and were at their lowest level since the September 2011 quarter. However they have risen to record highs since the June quarter ended.

Statistics NZ said the key contributor to the annual increase of 0.7% was a 12% rise in cigarette and tobacco prices because of a January 1 rise in excise duty.

"Housing rentals (up 2.1%) and purchase of newly built houses (up 4.1%) were influenced by price rises in the South Island, particularly Canterbury," Statistics NZ said.

"Electricity (up 3.4%) and local authority rates (4.3%) also increased in the year to the June 2013 quarter. These increases were partly offset by decreases for petrol (down 2.8%), telecommunication services (down 4.9%), domestic air fares (down 12%), and audio-visual equipment (down 14%)," it said.

Economists react

ANZ's Mark Smith said the result gave the Reserve Bank some breathing space.

"Although the Auckland housing market is overheated, OCR hikes are not imminent due to a patchy picture elsewhere. The RBNZ are likely to use prudential policy measures before resorting to OCR hikes," said Smith.

TD Securities' Annette Beacher said the Reserve Bank was in no position to increase the Official Cash Rate yet.

"If headline inflation was the sole target for the RBNZ there would be a strong case for easing, however accelerating house prices are the pressing priority for monetary policy," she said, pointing to her expectations for a rise in inflation to 2% within a year as higher construction costs and the lower New Zealand dollar feed through into prices.

"While we believe the RBNZ “should” be lifting the cash rate by year end, the Bank’s push towards macroprudential tools delays the tightening cycle into 2014, and we pencil in March.  But as we suspect this is too little too late, we forecast a relatively aggressive +100bp of tightening to 3.5% over 2014," she said.

ASB's Jane Turner said the low inflation rate would continue to hold the Reserve Bank back from a rate hike until March of next year. 

"At that point rebuild-related and generalised inflation pressures will be more evident, past declines in food prices and the past rise in the NZD will no longer be masking the underlying inflation picture, and the desire to contain house price will be just as pressing," she said.  

Westpac's Michael Gordon said the figures offered little comfort for the Reserve Bank.

"Domestic inflation is slowly but steadily rising on the back of building activity in Canterbury and Auckland – in much the same way as in previous construction booms," Gordon said.

"In contrast, the RBNZ has taken the view that housing-related inflation will be relatively contained this time, due to the localised and co-ordinated nature of the Christchurch rebuild. It could take some time to persuade the RBNZ otherwise, but today’s CPI report was one step in that direction."

BNZ's Craig Ebert pointed out the Reserve Bank always looked ahead with its monetary policy.

"In this vein, it’s worth recalling that the Reserve Bank started what turned out to be a long tightening cycle in early 2004, when annual CPI inflation was a mere 1.5%. And it rightly slashed rates aggressively beginning 2008, when headline inflation was 5.1%," Ebert said.

"For its part, the Reserve Bank has signaled no hikes for the coming 12 months (perhaps longer, according to the body language) while pinning a lot of hope on new macro- prudential tools to lean against the imbalances and risks it sees, principally in the housing market - hence its rush to introduce loan-to-value ratio restriction (in coming days, by all accounts), in true bureaucratic fashion. " 

(Updated with more Stats NZ detail, market reaction, charts, background, Comments from Economists)