By Bernard Hickey
Inflation was broadly in line with expectations in the March quarter, but economists said it remained far enough below the Reserve Bank's target band to leave open the possibility of another rate cut next Thursday.
The Consumer Price Index (CPI) rose 0.2% in the March quarter and was up 0.4% from a year ago as a 7.7% fall in petrol prices was almost enough to offset the effects of higher tobacco tax and a rise in rents, house building costs and council rates.
The quarterly inflation was slightly above the consensus forecast from economists for a 0.1% rise, but was in line with the Reserve Bank’s forecast and broader expectations for annual inflation of around 0.4%. This was the seventh consecutive quarter where annual inflation was at or below the bottom end of the Reserve Bank’s 1-3% inflation target. Annual inflation has been below the 2% midpoint specified in the Reserve Bank's Policy Targets Agreement for four and a half years.
A 10% rise in cigarette and tobacco prices generated 0.25 percentage points of inflation in the quarter, which meant the CPI would have fallen slightly without the tax hike.
The strongest inflation came from rents and the cost of building new houses, along with council rates.
Auckland rents rose 0.7% in the March quarter from the December quarter and were up 3.2% from the same quarter a year ago, which was almost twice as fast as the rental inflation of 1.7% of New Zealand excluding Auckland.
The cost of new house building in Auckland, which excludes land costs, rose 1.0% in the quarter and was up 7.6% from the same quarter a year ago. This was more than double the 3.5% annual increase in house building costs for the rest of New Zealand.
Property rates rose 0.1% in the quarter and were up 5.5% from the same quarter a year ago.
Tradable prices, which measures prices of goods and services exposed to international competition, fell 0.9% in the quarter and were down 1.2% from the same quarter a year ago. The annual deflation was more than the 1.1% forecast by the Reserve Bank.
Non-tradable prices rose 1.0% for the quarter and were up 1.6% from the same quarter a year ago. The annual non-tradable figure was above the Reserve Bank's forecast on March 10 for inflation of 1.4%.
Economist and market reaction
Westpac's Dominick Stephens said the result was a touch above his 0.1% forecast for the quarter and detracts from the case for a rate cut on April 28.
"We are finally starting to see some pass-through from last year's exchange rate decline into higher prices for certain tradable goods," Stephens said.
The New Zealand dollar rose from 68.8 USc to 69.1 USc after the result, while the two year swap rate rose two basis points.
ANZ Senior Economist Mark Smith said the moves in tradable and non-tradable prices were broadly offsetting.
"While the data certainly doesn’t rule out the RBNZ cutting the OCR again next week, we don’t see it as the smoking gun that the market was hoping it would be," Smith said.
"We continue to see the OCR going lower, but we are wary of the trade-offs this will bring."
ASB Chief Economist Nick Tuffley said the Reserve Bank's decision next Thursday remained a close call.
"The on-expectation inflation result suggests the RBNZ may see little urgency to deliver the next rate cut at the April OCR review, and may prefer to wait until the June MPS," Tuffley said.
"In saying this, given the persistent strength in the TWI, we cannot entirely discount an April cut as the decision will remain a close call."
BNZ and Kiwibank forecast the Reserve Bank would cut the OCR by a further 25 basis points on April 28 to 2.0%, while others said the central bank would wait until the next full Monetary Policy Statement on June 9.
Most think the Reserve Bank will cut the OCR by another 50 basis points to 1.75% this year.
Finance Minister Bill English welcomed the low inflation figure, saying average wages were rising faster than the cost of living to help households get ahead.
"We are in the unusual situation of having solid economic growth, more jobs and rising wages at the same time as very low interest rates and inflation," English said.
"Households with mortgages have the double benefit of low cost of living rises and lower mortgage servicing costs, which will be particularly welcome in regions with increasing house prices," he said.
"Overall, New Zealand is doing well and New Zealanders are reaping the benefit of a growing economy."
Green Finance Spokeswoman Julie Anne Genter said lower petrol prices disguised the fact that rents in Auckland were rising much faster than wages and other prices.
“If your rent is going up five percent but you’re one of the almost 50 percent of New Zealanders who didn’t get a pay rise last year, overall low inflation isn’t going to help you," Genter said.
"We urgently need stronger action to fix the housing crisis including a Government-led home-building programme, quality mid-rise apartments around major transport routes, and measures to stop speculation like a comprehensive capital gains tax (excluding the family home) and restrictions on overseas buyers,” she said.
(Updated with economist, market and political reaction, detail)