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RBNZ OCR preview and Q1 CPI

Data Flash (New Zealand)

RBNZ OCR preview and Q1 CPI

Key points

The CPI rose 0.7% in Q1, lifting the annual rate of inflation (RBNZ measure) from 1.3% to 1.7%. The official measure, which includes one quarter of the interest rate inclusive old regimen, rose by 1.5% on an annual basis.

The average market expectation was for an increase of 0.8%. The RBNZ was expecting an increase of 0.6%.

A 9% fall in international airfares made a significant downward contribution to the Q1 outturn. Excluding this impact - which is likely to reflect stronger than usual seasonal discounting - the remainder of the CPI grew by 0.9%.

Statistics NZ noted that price increases were widespread in Q1 - increases were recorded for goods and services representing 70% of the total regimen.

Our preliminary forecast for Q2 CPI inflation is 0.5% qoq, 1.8% yoy.

Looking ahead to the 19 April OCR review, we think that today's result, which follows a run of data pointing to growing pipeline and medium-term inflation pressures, will prompt the Bank to raise the OCR by 25bps.

The table below summarises the key data released since the RBNZ finalised its March MPS projections. The data is grouped according to whether the outturn is likely to have been stronger, weaker, or broadly similar to the Bank's expectations.

Key data released since RBNZ March MPS projections were finalised:

Stronger than the RBNZ Broadly as the RBNZ:::::Weaker than the RBNZ
::::: expected::::::::::::::: expected::::::::::::::: expected

Q4 GDP::::::::::::::: Q4 Export Prices::::: Feb Building Consents
Q4 Import Prices::::: Feb Retail Sales:::::
Q1 Consumer Confidence Feb/March ANZ Job Ads
March NBNZ Pricing::::: March ANZ Commod. prices
Intentions:::::::::: Q4 House Prices
Q1 CPI:::::::::::::::::::::::::

Source: DB Global Markets Research

The table shows that the data has tended to point towards higher rather than lower inflation pressures over the medium term. Of particular significance: Q4 GDP grew 2.2% compared with the RBNZ's forecast of 1.0%. Even allowing for the supply-driven contribution of agricultural production to overall growth, the output gap will now be more positive than the RBNZ expected when it finalised its March MPS projections. Q4 import prices grew 5.5%. We think the RBNZ were expecting an increase of no more than 2%.

Weakness in equity markets over recent days provides a countervailing factor. The main channel through which developments in equity markets will impact on the Bank's decision is through their impact on US and world economic growth, rather than through direct wealth effects on NZ consumers. At this stage, recent falls in equity prices are unlikely to have been sufficient to threaten seriously the world growth outlook underpinning the Bank's projections. Much will depend on where the equity market goes from here over the next day or so. But given that world growth forecasts have generally been revised up since the RBNZ published its forecasts in March, the fall in equity prices may simply lead the Bank to retain its March growth assumption. Thus we don't see this affecting the RBNZ's decision on Wednesday - a rise in the OCR is needed in NZ just to get monetary conditions closer to neutral.

Breakdown of the Q1 CPI

The main positive contributors to the Q1 result were:

- fruit and vegetables (+7.6%), which recorded a sharp rebound after three quarters of large falls;

- construction costs (+0.7%), which appear to have risen due to higher material costs (eg timber prices), wages and resource and building consent fees;

- dwelling insurance (+6.5%);

- petrol (+4.5%), reflecting movements in crude oil prices;

- used cars (+1.8%), reflecting NZD weakness;

- tobacco and alcohol (+0.9%), due in part to a rise in excise duty; and

- tertiary tuition fees (+10.5%), reflecting the reduction in Government funding.

The main negative contributors to the Q1 result were:

- phone calls (-2.8%),

- apparel (-0.6%), due to the usual Q1 discounting;

- international airfares (-9.6%), due to much stronger than usual seasonal discounting; and

- stationery supplies (-14.1%), reflecting the usual `back to school' discounts.

The main surprise was the sharp fall in international airfares. We think it very likely that this fall will substantially unwind in Q2.

Tradeables inflation was +0.6 (+0.9% annual), while non-tradeables increased by 0.7 (2.6% annual). The annual rate of non-tradeables inflation is running at the highest level recorded since Q2/1998.

Median inflation was +0.5% (+1.1% annual). This was the highest quarterly rise since Q2/1998.

The 19 April OCR review

In its March MPS the Reserve Bank raised the OCR by 50bps and signalled the need for further rises over the coming year in response to rising pipeline and medium-term pressures. Immediately following the MPS, around half of market commentators expected the RBNZ to move a further 25bps in April while half favoured no change.

As the earlier table showed, data published since the Bank's projections were finalised has generally suggested higher, rather than lower, medium-term pressures than forecast by the Bank. As a result, 10 out of 13 commentators now expect the Bank to move on Wednesday, a move that is now reflected in financial prices.

Notwithstanding present uncertainty in equity markets, there are sound reasons to expect the Bank to move on Wednesday.

The Bank had estimated previously that spare capacity in the economy has been exhausted. The much stronger than expected Q4 GDP data implies that the Bank's assessment understated the rate at which surplus capacity in the economy had been removed. Although there is room for legitimate argument about the amount of tightening that will eventually be required, given the starting point and the economic outlook, there can be no sensible argument for maintaining monetary conditions at a level which by the Bank's admission remain on the stimulatory side of neutral.

Moving 25bps in April gives the Bank greater flexibility in May. Should data continue to suggest strong inflation pressures, as we expect, the Bank will be able to advance the OCR to 6.5% without moving by more than the maximum preferred 50bp step. Should domestic or offshore developments point to weaker inflation pressures, the Bank will still have the option of deciding on a 25bp rise or no change at all.

On balance, we attach an 80% probability of the Bank raising the OCR 25bps on Wednesday

Darren Gibbs, Senior Economist, New Zealand

CPI Components
(regimen weights in brackets)
:::::::::::::::::::::::::::::::::::::::: q%:::::::::: a%
Food (18.2)::::::::::::::::::::::::::::::1.4::::: -0.2
Fruit/Vegetables:::::::::::::::::::::::::7.6::::: -8.1
Housing (23.0)::::::::::::::::::::::::: 0.8::::::::::2.4
Rentals:::::::::::::::::::::::::::::: 0.1::::::::::1.0
Construction Costs:::::::::::::::::::: 0.7::::::::::1.8
Household Operation (14.8):::::::::: -0.1::::: -0.4
H'hold Appliances/Furnishings:::::::::: 0.2::::::::::0.2
Phone Calls::::::::::::::::::::::::: -2.7::::: -20.4
Apparel (3.7)::::::::::::::::::::::::: -0.6::::::::::1.1
Transport (15.4):::::::::::::::::::::::::0.1::::::::::5.0
Domestic Air Travel:::::::::::::::::::: -1.0::::: 14.5
International Air Travel::::::::::::::: -9.1::::: -0.9
Used Cars:::::::::::::::::::::::::::::: 1.8::::: -5.8
Petrol:::::::::::::::::::::::::::::::::::4.5::::: 19.6
Tobacco/Alcohol (9.3)::::::::::::::::::::0.9::::::::::1.8
Personal/Health Care (6.1):::::::::::::::0.3::::::::::0.8
Recreation/Education (8.8):::::::::::::::1.5::::::::::2.9
Tertiary Tuition:::::::::::::::::::: 10.5::::: 10.5
Credit Services (0.7)::::::::::::::::::::0.0::::: -5.5

Total CPI (100.0):::::::::::::::::::: 0.7::::::::::1.5
Source: DB Global Markets Research, Statistics NZ

Analytical Price Series
::::::::::::::::::::::::::::::::::: q%:::::::::: a%
CPI:::::::::::::::::::::::::::::: 0.7:::::::::: 1.7
Tradeables::::::::::::::::::::::::: 0.6:::::::::: 0.9
Non-Tradeables:::::::::::::::::::: 0.7:::::::::: 2.6
Weighted Median:::::::::::::::::::: 0.5:::::::::: 1.1
Source: DB Global Markets Research, RBNZ

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