Weak pricing data in business survey supports further interest rate cuts, NZIER says

The vast majority of New Zealand businesses were unable to increase their prices in the three months ended September, despite many facing higher input costs, according to the latest Quarterly Survey of Business Opinion. 

Only 3% of all firms in the NZ Institute of Economic Research’s survey passed on cost increases in September, down from 23% in the June quarter and well below the 26% long run average, even though 41% reported their own costs increasing.

Christina Leung, the deputy chief executive, said the Reserve Bank had highlighted these pricing intention measures as a factor in their decision to begin easing monetary policy in August. 

“We do expect [this new data] supports the case for further OCR cuts over the coming year,” she said on Tuesday morning.

These results could be used to make a case for either a 25 or 50 basis point cut in October, but she thought the strong response to confidence after the first cut and predictions for a rebound in demand would tip the balance towards 25 points. 

Business confidence improved sharply in September. While a net 5% still expected conditions to worsen in the coming months, this was down from a net 40% in the previous quarter. 

A net 31% of firms reported a decline in their own trading activity during the quarter but only a net 2% expect that to be repeated in the coming quarter. 

Leung said the improvement was most visible in the retail sector where a net 13% expected economic conditions to get better, even though sales and profitability were weak in the September quarter.

Despite the improved outlook, a net 9% of firms plan to reduce their staff numbers in the next quarter and between 25% and 17% plan to make fewer investments in buildings and machinery. 

“Until there is more conviction about a sustained recovery in demand, firms are likely to remain cautious about any expansion in operations,” Leung said.