Wednesday, April 17, 2013

NZ CPI in line with (RBNZ) expectations

The NZ March quarter CPI came in at +0.4% q/q for an annual increase of 0.9%.  That’s a touch lower than average market expectations of +0.5% q/q, but bang on the Reserve Bank’s forecast.

The make-up of the increase was much as expected with Government charges (e.g. tobacco excise, prescription charges) contributing a significant portion of the increase.  The housing and household utilities group was up 0.6% q/q.  Within that rentals were up 0.7% q/q (Canterbury up 2.1%).  Food prices were up 0.7% over the quarter.  On the downside the transport, household contents & services, communication and clothing & footwear groups all recorded price falls.

The strong exchange rate and low imported inflation continue to be the most significant disinflationary forces.  While the overall CPI rose 0.4% over the quarter, the average price for traded goods FELL 0.5% while non-traded goods prices ROSE an average 1.1% over the same period.  The annual rate of traded goods inflation is now at -1.1% while the annual rate of non-traded goods is +2.4%.

Therein lies the conundrum for monetary policy.  On the one hand the exchange rate (in trade weighted terms) continues to go from strength-to-strength, putting continued downward pressure on inflation.  At the same time, the economy is growing in excess of potential, leading to the absorption of spare capacity in the economy and a closing of the output gap.  This will eventually put upward pressure on prices.  It’s not the absolute level of growth that matters for monetary policy it’s how fast the economy is growing relative to its potential growth rate.  We put New Zealand’s potential growth rate at around at around 2%.   Furthermore, we know the Reserve Bank is concerned about the renewed strength in the housing market.

That has us still expecting the next move in interest rates will be up, it’s just a question of when.  A cut to interest rates now would simply create a bigger headache down the track by further stoking the housing market.  And we don’t think a reduction in interest rates would make a significant amount of difference in the level of the New Zealand dollar.  There are other things at play there.

Neither do we expect the likely introduction of macro-prudential tools later this year to make much difference to the interest rate outlook.  By the time the tools are deployed the housing cycle will be well advanced, and their efficacy is still yet to be proven.  And of course much of the housing market imbalance is supply-side in nature.  Macro-prudential tools will be at most a complementary demand-side tool to work alongside the traditional demand management tool – interest rates.  I’m still expecting the first hike in rates in December this year.