NZ: inflation fell sharply, RBNZ to cut 100bp

New Zealand: inflation fell sharply in 4Q. RBNZ to cut 100bp next week.

• Headline inflation fell to 3.4%oya in 4Q

• Non-tradable inflation accelerated again

• RBNZ to cut OCR 100bp on January 29

Inflation in New Zealand, as measured by changes in the consumer price index, moderated sharply in 4Q, falling -0.5%q/q, compared to 1.5% in the previous three months (J.P.Morgan 0.1%, consensus -0.4%). The main driver of the significant fall was lower petrol prices (-22.4%q/q). According to Statistics NZ, had petrol prices remained unchanged, the CPI would have increased 0.9%q/q.

From a year ago, consumer prices grew 3.4%, a sharp contrast to the 18-year high of 5.1% in 3Q, although still above the top end of the RBNZ's 1-3% target range. Half of the increase in annual inflation was owing to higher food prices (+9.4%).

Surprisingly, non-tradable inflation - generated domestically and not influenced by exchange rate fluctuations - accelerated again in 4Q, rising to 4.3%oya from 4.1% in 3Q and 3.4% in 2Q. This was the largest increase in non-tradable inflation in three years. We had expected that non-tradable inflation would ease in line with the slowdown in the domestic economy, but higher prices for "electricity, actual rentals for housing, purchase of new housing, and local authority rates and payments" drove non-tradable inflation higher in 4Q.

We were also surprised by the sharp slowdown in tradable inflation. Tradable inflation, which jumped to 6.3%oya in 3Q, slowed to just 2.3% in 4Q, even though the NZD shed 14% vis-Ã -vis the US dollar during the final three months of the year.

The sharp downturn in the economy should help inflation return to target in 2009. Indeed, pipeline pressures and inflation expectations have started to ease and, in our forecasts, annual inflation will fall below the RBNZ's target range of 1-3%oya by 4Q09. We forecast a trough of 0.3% in headline inflation in 3Q.

The problematic global economic and financial market outlook, sagging domestic house prices, the falling terms of trade, and the improving prospect that inflation will return to target range in the near term provides ample scope for the RBNZ to ease policy assertively. Following last week's downgrade of the New Zealand outlook from stable to negative by S&P and further dismal economic data from offshore, we believe the RBNZ will opt to ease policy more aggressively at the upcoming January meeting. In a change of forecast, we look for the RBNZ to cut the OCR 100bp cut on January 29. Previously, we had expected a 50bp move.

See: CPI_4Q08.pdf

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