UPDATE: NZ inflation missing in action in second quarter

UPDATE: NZ inflation missing in action in second quarter;
kiwi dollar drops

(Update recasts lead, adds swap rate
move and economist comment)

By Rebecca Howard

July 18
(BusinessDesk) – New Zealand consumer prices were unchanged
in the second quarter, pushing the dollar and swap rates
lower as the market pared back expectations the central bank
might soon join others – like the Bank of Canada – that have
lifted or are expected to lift rates soon.

The kiwi
dollar dropped to 72.61 US cents after the figures were
released from 73.26 cents immediately before Statistics New
Zealand said the consumers price index was unchanged in the
three months to June 30 while annual inflation was 1.7
percent. Two-year swap rates dropped around 5 basis points
to 2.20 percent and the OIS market is now pricing in a rate
hike in August 2018, two months later than it was prior to
the data.

Economists had expected inflation of 0.2
percent in the second quarter, for an annual rate of 1.9
percent, according to the median in a poll of 15 economists
surveyed by Bloomberg. The data also undershot the central
bank’s forecasts for inflation of 0.3 percent in the
second quarter for an annual rise of 2.1 percent. Second
quarter inflation eased back from the first quarter when it
was 1 percent and the annual rate was 2.2

“Together with recent soft GDP figures, today’s
data and the mixed forward-looking inflation signals will
leave the RBNZ fully vindicated in its ultra-cautious stance
and no doubt the market will shift more towards its view,”
said ANZ senior economist Phil Borkin.

The Reserve Bank
is mandated with keeping annual inflation between 1 and 3
percent, with a focus on the mid-point. At the June rate
review, Reserve Bank governor Graeme Wheeler kept the
official cash rate at 1.75 percent and said the bank viewed
a recent pickup in inflation as a temporary spike in the
tradables sector.

Today’s data, where weaker fuel prices
offset rises in household basics like rent, food and
electricity, has added to that view.

“Overall, these
figures should prompt the markets to conclude that interest
rates are unlikely to be raised next year. The RBNZ is
unlikely to follow in the footsteps of the Fed and the Bank
of Canada until it looks as though underlying inflation will
be sustained above 2.0%. That probably won’t happen until
2019,” said Capital Economics chief Australia and New
Zealand economist Paul Dales.

The central bank’s
forecasts show it does not expect rates to lift until
September 2019 at the earliest while several economists have
been signalling mid-2018 as the most likely starting point
but “today’s result should put a severe dent in market
expectations that the RBNZ will be hiking rates by mid-2018,
said Westpac Bank acting chief economist Michael Gordon.

Petrol prices fell 1.9 percent in the quarter and were up
4.5 percent on the year. The average price of 1 litre of 91
octane petrol was $1.86 in the June quarter, down from $1.90
in the March quarter but up from $1.78 in the June quarter a
year earlier.

Overall the transport sector – which
includes fuel and other services such as airfares – fell
1.3 percent on quarter and showed an annual rise of 1.2
percent. Domestic airfares were down 14.5 percent in the
quarter while international air transport rose 3.7

The slide was offset by a 0.7 percent rise in
food prices on the quarter, with vegetable prices jumping 19
percent, reflecting poor weather and growing conditions.
Dairy prices were also up, with prices for butter reaching
their highest price since the series began, Stats NZ

Housing-related prices continued to increase, up 0.8
percent on the quarter and 3.1 percent on the year. Prices
for new housing rose 1.8 percent in the June quarter for an
annual increase of 6.4 percent. Rental prices rose 0.4
percent in the quarter and 2.1 percent on the year.

body rates eased 0.1 percent in the quarter and were up 3.2
percent on the year while refuse disposal and recycling fell
1.3 percent in the quarter but rose 4.5 percent on the year.
Household energy, which includes electricity, gas and solid
fuels rose 1.5 percent in the quarter and 1.8 percent on the

The tradables consumers’ price index, which
includes goods and services that compete with international
rivals, fell 0.2 percent in the quarter but rose 0.9 percent
on the year. Non-tradables inflation, which focuses on
domestic inflation, rose 0.2 percent in the quarter and was
up 2.4 percent on the year. Prices for the purchase of
newly built houses, excluding land, made the most
significant upwards contribution to the annual



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