Australia Economic Research

Australia Economic Research

New Zealand: consumer prices fell in 4Q, but medium-term inflation outlook a concern

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Inflation in New Zealand eased in the final three months of 2009, but the medium term outlook reaffirms our view that the RBNZ will need to tighten monetary policy before official guidance suggests. Falling in line with the RBNZ’s forecasts, consumer prices fell 0.2%q/q in 4Q (J.P. Morgan: -0.3%, consensus: 0.0), owing mainly to lower food prices, but also high base effects. Third quarter CPI was pushed higher by one-off influences. Annual inflation accelerated to 2.0% in the fourth quarter, printing at the centre of the RBNZ’s 1-3%oya target range.
 
The non-tradable measure—inflation generated domestically and not influenced by the exchange rate—weakened significantly Non-tradable inflation printed at 2.3%oya in the December quarter (JP. Morgan: 2.8%, consensus: 2.5%), marking the lowest annual increase since 4Q01, thanks to lower prices for electricity, rents, and the purchase of new housing. The tradable component rose 1.5%oya, but was down 0.5% over the quarter owing to the stronger NZD.  

 
In our view, non-tradable inflation, although now within the RBNZ’s comfort zone, will creep higher throughout 2010 as New Zealand’s economic recovery gathers momentum (chart above) Domestic conditions have improved and a growing number of firms intend to raise selling prices as demand strengthens. Rising domestic prices and signs that excess capacity is diminishing (chart below) suggest that upward inflation pressures in the medium term will be a key concern for the RBNZ. Dr. Bollard will, therefore, be reluctant to leave the cash rate too low for too long.
While we currently maintain our view that the first official cash rate hike will be delivered in March (+25bp), we acknowledge the risk that such a move may be postponed if the near-term economic data disappoints. A weaker than expected retail sales number, for example, certainly would cast doubts over the timing of the RBNZ’s first rate move. We expect retail sales values to print at a solid 0.5%m/m in November when released tomorrow. That all said, the first rate hike will likely be delivered before mid-year, otherwise the RBNZ will risk runaway credit growth and another debt-fueled house price bubble, which would be difficult to temper further down the track.

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