By Roger J Kerr
The interesting question as to whether our inflation rate can remain at the record low levels throughout 2016 was not helped by today’s March quarter inflation increase coming out bang on the RBNZ forecast of +0.20%.
The game of two halves continues with non-tradable inflation up 1.00% for the quarter and tradable inflation down 0.9% for the quarter due to the fall in petrol prices.
The real surprise in the inflation numbers was that some imported consumer goods such as clothing and footwear were down in price despite the NZD/USD exchange rate depreciating by over 10% over the last 12 months. Lower global commodity prices are clearly off-setting the currency impact in respect to imported consumer items.
Whilst the NZD/USD exchange rate remains above 0.6800, the odds favour the RBNZ cutting the OCR again on April 28. They will be hoping that the financial market reaction will be more helpful to their inflation cause (i.e. a lower Kiwi dollar lifting the price of imported goods in the CPI) than the last OCR cut back in March when the NZ dollar subsequently appreciated.
The challenge of the RBNZ with inflation control will be when oil price reductions fall out of the annual numbers and the higher inflation in the non-tradables side becomes fully exposed. The timing of that eventuality does seem further way and they are prepared to take some risks in the meantime to get the Kiwi dollar down.
The dairy sector certainly needs the Kiwi dollar to re-align with US$2,000/MT Wholemilk Powder prices which correlate to a 0.6400 NZD/USD exchange rate.
The “future intentions” signals from the RBNZ’s March Monetary Policy Statement were fairly strong. The will cut the OCR rate again.
Nothing much has changed over the last month other than the NZD has appreciated and global markets have remained settled and do not seem to reflect the global economic risks that Ms Yellen and Mr Wheeler fret about.
However, the way the RBNZ look at the currency value against economic fundamentals is that the Kiwi has moved up due to a weaker USD/stronger AUD. Our dairy prices (a major fundamental for the NZ economy) have remained on their lows. The Kiwi dollar at 0.6900 NZD/USD and 72.66 TWI is out of whack with the deteriorating economic fundamental of low dairy prices. For this reason alone they will cut the OCR again and worry about housing market bubbles later!
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com