Today’s June quarter CPI came in a tad softer than expected at +0.3% q/q. Average market expectations were for a quarterly increase of +0.4%. The annual rate came in at +1.6%.
As expected the Housing and household
utilities and Food groups provided much of the upward contribution over the
quarter rising 1.2% and 0.9% respectively.
That said the increase in the former was a tad lower than we were
expecting and was in fact driven mostly by an increase in electricity
prices. Indeed non-tradable (i.e.
domestic) inflation came in at just 0.4% while the Reserve Bank was expecting
+0.7% so this result isn’t going to spook the RBNZ.
And this data came in on the same day we saw
another large fall in dairy prices in the global dairy trade auction. Prices came off another 8.9% overnight, with
the cumulative decrease since the start of the year now indicative of a dairy
payout of around $6.00- 6.50 per kilo and a reduction in dairy farmer incomes
of around $4 billion compared with last season. While that’s consistent with our expectation
that GDP growth has probably peaked, the dairy price decline is larger than we
had expected to see.
What does this mean for the RBNZ? The expectation has been they will tighten at
the OCR review next week and then pause for a while. We still think that’s the case. The reality is we still expect growth to be
running ahead of potential which will necessitate interest rates back towards
neutral at some point so we think the Bank would prefer to get another one done
That said the cause for a pause in the
tightening cycle just increased. We have
said all along that it was particularly the trajectory of the exchange rate
that would determine both the phasing and the ultimate peak in the tightening
cycle. That’s still the case. The reality is the combination of dairy
prices falling more than expected, continued strength in the exchange rate and
continued interest rate increases just don’t add up.
So expect another 25bp hike next week and
then a pause. The only question now
seems to be the length of the pause…