- Annual rate drops to 6.7%; central bank forecast acceleration
- Economists expect RBNZ to deliver final rate increase in May
According to Bloomberg article published on April 20, 2023, New Zealand inflation slowed more than economists expected in the first quarter, suggesting price pressures have peaked and the central bank may soon call an end to its aggressive tightening cycle. The local dollar fell.
The annual inflation rate declined to 6.7% from 7.2% in the final quarter of 2022, Statistics New Zealand said Thursday in Wellington. Economists expected 6.9% while the Reserve Bank was picking an acceleration to 7.3%.
The RBNZ has been hiking its Official Cash Rate at record pace to tame inflation, this month delivering a bigger-than-expected 50 basis-point increase to 5.25%. Today’s softer inflation numbers may not be enough to dissuade policymakers from raising the OCR by a further 25 points at their next meeting on May 24, taking it to a peak of 5.5% before pausing to assess the impact.
“Inflation is still running red-hot and it remains well outside the central bank’s target range,” said Satish Ranchhod, senior New Zealand economist at Westpac in Auckland. “However, it’s looking increasingly likely that May will be the last rate hike in the current cycle. Inflation has fallen well short of the RBNZ’s forecasts for a second quarter.”
New Zealand’s dollar fell more than a third of a US cent after the inflation report to buy 61.60 cents at 11:40 a.m. in Wellington. Bond yields and swap rates retreated.
Recession Looming
The rapid increase in borrowing costs is projected to drive the country into recession this year. It may already be in one after the economy contracted in the three months through December. House prices are falling and businesses are downbeat.
At the same time, the RBNZ is concerned that recent severe weather events in the North Island have boosted prices for some goods and services, and that persistently high headline inflation could see inflation expectations stay above its 1-3% target range.
At the last policy review on April 5, the RBNZ said demand “continues to significantly outpace the economy’s supply capacity,” thereby maintaining pressure on inflation.
The bank “is expecting to see a continued slowing in domestic demand and a moderation in core inflation and inflation expectations,” it said, adding “the extent of this moderation will determine the direction of future monetary policy.”
Consumer prices advanced 1.2% from three months earlier, less than the 1.5% forecast by economists and down from the 1.4% gain in the previous quarter, today’s report showed.
Food was the largest contributor to the annual inflation rate, with vegetable prices rising 22% in the 12 months through March, the statistics agency said. The next biggest contributor was housing and household utilities due to rising prices for construction and rents.
Non-tradables inflation, a closely watched indicator of domestic price pressures, was 1.7% in the quarter and 6.8% in the year — the highest annual rate since the series began in 1999. Tradables inflation, which is influenced by the exchange rate, was 0.7% in the quarter and 6.4% in the year.
The inflation report was better than expected, “but the caveat is that it’s very concentrated in a few components, mostly on the tradable side,” said Craig Ebert, senior economist at Bank of New Zealand in Wellington. “The core measures will have slowed a lot less, so there will still be an undercurrent of caution. But it is a step in the right direction.”
