Tuesday, July 17, 2012

NZ inflation at lowest since 1999


New Zealand June quarter inflation came in at 0.3% for the quarter and 1.0% for the year.  That’s softer than average market expectations of 0.5% and 1.2% respectively.  This result doesn’t change our view that the next move from the RBNZ is a hike in interest rates, but they can wait until next year before pulling the trigger.

The dominant feature of the lowest annual CPI inflation rate since 1999 has been the strong disinflationary effect of the strong New Zealand dollar.  Indeed annual “tradeable” inflation fell to rate -1.1% in the year to June.  By comparison “non-tradeable” inflation came in at +2.4%.

With regard to implications for monetary policy from this result, there are none.  It does not alter our view that there is no scope for an interest rate cut (unless things go from bad to worse in Europe), that the next move in interest rates is up, but that the RBNZ still has time in its side. 

Low current inflation is not a reason to leave monetary conditions unchanged: monetary policy is about where inflation is going, not where it has been.   There are sufficient signs pointing to higher core inflation over time.  These include capacity utilisation and difficulty in finding skilled labour which are already consistent with a tick-up in core inflation pressure.  Also remember that potential growth is now lower than it was pre-GFC.

A key area of interest for the RBNZ will be construction costs given indications of a modest recovery underway in the housing market.   Constructions costs rose 0.9% over the quarter to be up 2.8% over the year.  That’s not insignificant, especially with a known and significant increase in activity in that sector yet to come.

We still have the first hike in the OCR pencilled in for mid-next year with a gradual increase to 4.5% by late 2014.  That is a modest tightening in monetary conditions by historical New Zealand standards.