Tuesday, October 16, 2012

NZ CPI lower than expected, but no rate cut

New Zealand September quarter CPI inflation printed at +0.3% q/q, lower than the average market expectation of +0.5%.  The annual rate of increase now stands at 0.8%, below the bottom end of the Reserve Bank’s target range.  However, the lower than expected result does not change our view of the next move in interests being a rate hike in June 2013.

The key feature of the result was the continued inflation-dampening impact of the high New Zealand dollar.  Tradeable sector inflation came in at 0% for the quarter for an annual rate of -1.2%.  However, non-tradable inflation came in at +0.5% q/q for annual rate of +2.3%.  The distinction is important for reasons other than discerning the impact on inflation of changes in the level of the New Zealand dollar: it is non-tradable inflation that the Reserve Bank has most direct impact on via its monetary policy settings.

Another important factor in today's result is the continued emergence of inflationary pressures in the housing sector.  This is a key factor in our belief that an interest rate cut remains unlikely in the period ahead.  Remember, monetary policy settings are already highly stimulatory.

At this point I'm still happy with the view that the next move from the Reserve Bank is a rate hike.  However, likely soft GDP growth over the next six months suggests the Bank still has time on its side.  After growing 1.6% in the first half of 2012 we believe New Zealand GDP growth will be around half that level in the second half of the year: we have +0.4 q/q pencilled in for the September quarter and +0.5% q/q in December.

With respect to the global economy, we believe we are currently seeing the early signs of stabilization in the recent slowdown in economic growth.  By early 2013 we expect there will be clear signs of a (modest) recovery.  The key risk to that view is the impending US “fiscal cliff”.  At this point our view remains that can gets kicked down the road a few months.  

A recovery in global growth will be supportive of a recovery in NZ export demand and commodity prices.  Furthermore, we expect Christchurch rebuilding efforts to be gathering momentum as 2013 progresses.  This will be a key factor behind the expected absorption of spare capacity in the domestic economy next year.

It's important not to read too much into historical inflation results.  While they have some information content it's important not to forget that monetary policy is about where inflation is heading, not where it's been.  I'm therefore still happy with our central case scenario that the RBNZ will start to move interest rates higher from June next year.