By Bernard Hickey
Inflation is again proving to be weaker than everyone expected, extending the length of the Reserve Bank's rate hike pause until September 2015 at the earliest.
Statistics New Zealand has reported the Consumer Price Index (CPI) rose 0.3% in the September quarter and was just 1.0% higher for the year to the September quarter, which was weaker than the economist consenus forecast for quarterly inflation of 0.5% and annual inflation of 1.1%. It was also much weaker than the Reserve Bank's own forecast for a 0.7% rise for the quarter.
The weaker than expected inflation figure is viewed as reducing pressure on the Reserve Bank to hike the Official Cash Rate again any time soon. It forced Westpac and ASB to delay their OCR hike forecasts to September 2015 from March and June respectively. Most thought before the CPI figure that the Reserve Bank would hold the OCR at 3.5% until June at the earliest. Now ASB, Westpac and BNZ expect the next rate hike in September, while ANZ thinks it will not be until Decmeber next year.
The New Zealand dollar dropped half a US cent in late morning trade to NZ$78.7 USc and is down around a cent from late yesterday as investors look at the prospects for low interest rates for longer, which makes the New Zealand currency relatively less attractive than others where interest rates are also stable but much closer to 0%.
"The Reserve Bank will be very nervous about inflation falling to the very lower limit of its allowable inflation range," said Westpac Chief Economist Dominick Stephens. He later shifted his next OCR hike forecast to September 2015 from June 2015.
"Inflation has consistently surprised on the downside, despite strong economic growth. This has prompted the Reserve Bank to rethink how domestic activity, migration, housing, and the exchange rate affect inflation," he said, pointing to the bank's signal in its September Monetary Policy Statement of "a period of monitoring and assessment," he said.
"With the RBNZ in "inflation watch" mode, and inflation at 1.0%, it is safe to assume that the OCR will not rise for quite some time. We can expect next week's OCR Review to be very dovish."
ANZ Senior Economist Mark Smith said the details in the figures were benign and showed signs of a structural shift lower in inflationary pressure, both globally for reasons such new technology and deleveraging, and locally as microeconomic reforms helped improve productive capacity.
"The bottom line is no imminent need for the OCR to move until late in 2015 and possibly later," Smith said.
Inflation mostly dead
Housing rents and council rates drove much of the increase in the quarter, Statistics New Zealand said. This was the third consecutive quarterly rise for the CPI of 0.3% and the annual inflation figure of 1.0% was down from 1.6% in the June quarter and 1.5% in the March quarter.
“Higher housing-related prices were responsible for about three-quarters of the rise in the CPI this quarter. The rest of the basket was relatively subdued,” Statistics New Zealand prices manager Chris Pike said.
Overall CPI inflation for the quarter would have been less than 0.16% without the increase in rents and rates.
Housing and household utilities prices rose 1.0% in the quarter after local authority rates, which are often increased in September quarter, rose 3.8%.
Household contents and services prices fell 1.3% as prices fell for textiles, furniture, and whiteware. Communication prices fell 1.4% as services costs fell 1.1% and handset costs fell 7.5%.
Transport prices rose 0.1% in the quarter, with a 1.0% rise in petrol prices and a 1.4% rise in international air fares offset by a 1.0% fall in car prices and a drop in warrants of fitness costs because of the change to annual warrants from six monthly warrants.
"Overall food prices were flat, but there was a relatively large fall for bread, with supermarkets discounting some of their own-brand bread to about $1.00," Pike said.
Annual inflation
Housing and household utility costs rose 2.2% for the year and newly built home costs rose 4.8%. Rentals rose 2.2% for the year and electricity costs rose 3.7%, while cigarette and tobacco prices rose 11.6% because of higher excise duties imposed in January.
Audio-visual and computing equipment prices fell 9.8% for the year.
Tradeable prices fell 1.0% for the year, while non-tradeable rose 2.5%, reflecting price rises for cigarettes and tobacco, rentals for housing, purchase of newly built housing, and electricity.
Economic and political reaction
Westpac Chief Economist Dominick Stephens
Inflation is likely to remain low for quite some time. Consequently, we now expect the RBNZ will leave the OCR unchanged at 3.5% until September 2015. Next week's OCR preview will express a similar sentiment - the OCR is set to remain on hold for the foreseeable future.
ANZ Senior Economist Mark Smith:
While we are coy about jumping on ‘new paradigm’ band-wagons, we do note that inflationary dynamics do appear to be changing. The CPI report confirms that there is no hurry for the RBNZ to resume OCR increases.
There looks to be more in the "structural" shift story in the evolution of inflationary pressure. Some reflects global facets (deflationary forces, technology, deleveraging) but also we suspect a stronger potential growth rate across the NZ economy and an uplift in productivity. Add into the mix a more balanced risk profile around the economic outlook, a pretty sound microeconomic agenda (which is helping smooth the edges of inflationary forces from the likes of housing shortages) and an economy that looks set to be operating at close to trend (3%) over the coming year, and catalysts for monetary policy to shift the OCR higher are absent.
The risk profile is tilting towards a prolonged pause and later resumption of OCR hikes towards the RBNZ’s prescribed 4.5% neutral level, with the timing conditional on the NZD and economic developments, both here and abroad. For now, it feels like more than a year away. We now expect the resumption of rate hikes at the end of 2015, with low CPI outturns until then tying the Reserve Bank’s hands.
ASB Senior Economist Christina Leung:
The 0.3% increase in Q3 CPI was below our, market and RBNZ expectations. The result points to an even more subdued inflation environment than both we and the RBNZ expected, with the surprise across both tradable and non-tradable inflation. Annual inflation is now at the bottom of the RBNZ’s target band, and looks likely to remain around 1% or even slightly below that over the next two quarters.
A number of developments, including the benign inflation environment, have led us to push back our expected timing of when the RBNZ will resume its tightening cycle from March to September 2015. Beyond that, we have another OCR increase pencilled in for March 2016 for an OCR peak of 4% - lower than our expected peak of 4.5% previously.
BNZ Economist Craig Ebert:
Rightly or wrongly today’s data will feed the Reserve Bank’s concerns about chronically over-forecasting CPI inflation while also sustaining the market’s current predilection to write off the idea of any further increase in the Official Cash Rate this cycle, full stop.
The quarterly CPI result dragged annual inflation down to 1.0% – the bottom of the Reserve Bank’s 1.0 to 3.0% target band or, more to the point, 1.0% below its 2.0% mid-point. It’s a big miss, and also when considering the Bank was expecting a 1.3% annual outcome, based on the 0.7% advance it estimated for Q3 inflation itself. This continues a tendency of the Reserve Bank’s over recent years of over-forecasting inflation. And so the self-analysis will persist.
We project annual CPI inflation to pick up less aggressively over the next 12-24 months than we did previously. With today’s (soft) Q3 CPI now slotted in, we forecast annual CPI of 1.9% over calendar 2015 and 2.5% over the course of 2016.
This harmonizes with the delayed OCR profile we’ve recently instituted; namely, a next 25 basis point hike in September, followed by hikes in October, December and, finally, March 2016. This would establish an OCR peak in the cycle of 4.50%.
Green Party Co-Leader Metiria Turei:
The Consumer Price Index (CPI) rose just 1.0 percent in the year to September while power prices rose 3.7 percent. Since December 2008, when National took office, power prices have risen 24.6 percent and the CPI has risen 11.8 percent.
"New Zealanders know that our electricity market is not working when power prices have doubled in 15 years, even though demand is flat or falling,” Green Party Co-leader Metiria Turei said today.
“Kiwis have just had a guts-full of price rises when power companies are reporting flat or falling demand for power,” Mrs Turei said.
“The power companies are making exorbitant and ever-increasing profits. In a true market, when sales fall, a company’s profits go down, but in this case they just hike prices regardless and families have no choice but to pay.
“Today, we have energy poverty to the extent that 41,000 families were disconnected because they were unable to pay their power bill last year.
"Something has to change. Excessive electricity prices are a deadweight on our economy, which costs businesses and jobs, and is a drain on strained family budgets that results in cold, underheated houses.”
(Updated with economist and political reaction, market reaction, detail, image, chart)
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.