Inflation result won’t stop OCR cut
Inflation was slightly above forecasts in the September quarter, but the result is not likely to deter the Reserve Bank from cutting the OCR next month.
Tuesday, October 18th 2016, 3:03PM
by Miriam Bell
New Zealand’s annual rate of inflation slowed to 0.2% in the September 2016 quarter, which means inflation for the year to September 30 was also 0.2%
This is in comparison to the June 2016 quarter when inflation came in at 0.4%.
While housing and household utilities prices rose by 1.1%, this was countered by a 3.0% decline in transportation prices which had the biggest downward contribution.
The inflation result was up on the March quarter – when it hit a 16 year low of 0.1% - but is still far off the Reserve Bank’s target range of 1% to 3%.
However, economists said the September quarter’s inflation was higher than expected by both the Reserve Bank and the market.
ANZ senior economist Philip Borkin said the main surprise was the quarter’s stronger tradable prices, but it remained to be seen whether it was a turning point.
“Whatever the case, base effects should mean that Q3 marks the low for annual headline inflation.
“Beyond the influence of one-offs, it is clear that domestic price pressures are lifting gradually as capacity strains emerge. But at this stage decent price increases are largely confined to housing.”
The result will not stand in the way of the Reserve Bank cutting the OCR again next month, but it raised the question of whether there will be additional easing beyond that, Borkin said.
“The case is building that absent global-centric events, the OCR should not fall further… Though this will clearly frustrate, with the NZD to settle higher and the game of chicken between the OCR, inflation profile and NZD to continue.”
ASB chief economist Nick Tuffley said both tradable inflation and non-tradable inflation rose by more than expected over the September quarter.
“As a result, the underlying picture suggests that the economy is beginning to generate a little more inflation, with construction costs looking set to remain a key driver of domestic inflation.
“However, if the NZD remains elevated, this will continue to pose downside risks to the inflation outlook.”
On balance, although inflation remains weak, the Reserve Bank is likely to be content with the result, Tuffley said.
“We continue to expect the Reserve Bank to cut the OCR in November. There remains the risk of a further cut in 2017, but this CPI outcome does not add to the case for such a move.”
An OCR cut is still on the cards, despite the inflation result, Infometrics economist Mieke Welvaert agreed.
“Even though there was a lift in underlying price growth during the September quarter, we still expect the Reserve Bank to follow through with its much-awaited 25 basis point cut to the OCR in November.”
This is because inflation has been running below the Reserve Bank’s medium-term target range since December 2014 and this is likely to prompt it to take action in November.
But there was some strength emerging in underlying inflation measures and the US Federal Reserve is expected to make one of its promised cash rate hikes before the end of this year, Walvaert said.
“So we do not think that cutting New Zealand’s OCR to below 1.75% will be necessary.”
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