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NZ inflation rising: case for a near term hike strengthens

NZ inflation rising: case for a near term hike strengthens

New Zealand’s Q4 CPI print surprised the market on the upside, rising by +0.1% q-o-q (market -0.1%). For the year, CPI inflation was +1.6% (market +1.5%). Annual inflation was at its fastest rate in 7 quarters. The lift in inflation is consistent with a pick-up across a range of other demand indicators. Growth is also picking up more quickly than the RBNZ had forecast in its last official statement – Q3 GDP was stronger than expected and the timely surveys suggest strong growth in Q4. The case for a near term cash rate hike is strengthening. We continue to expect a hike in Q1 and now see a January rate rise as likely.

- Headline CPI increased by +0.1% q-o-q and +1.6% y-o-y (market had +1.5%; RBNZ had +1.4%; HSBC had +1.7%).

- Tradable inflation fell -0.3% y-o-y, while non-tradable inflation rose by +2.9% y-o-y.

- The trimmed mean measures ran at an annual pace of +1.6% and +1.7% y-o-y.

- Price rises occurred in international airfares (+12% q-o-q), partly reflecting seasonality, and housing costs (+0.5% q-o-q). Vegetable prices fell (-20% q-o-q) as did petrol prices (-3.5% q-o-q), partly reflecting a stronger NZD in the quarter.

New Zealand’s economy is at the beginning of a boom and today’s CPI print showed that it is slowly starting to feed through to a pick-up in inflation. The Q4 print showed that CPI inflation rose by +1.6% y-o-y, which still in the lower half of the RBNZ’s target band (1-3%), but it is now running at its fastest rate in seven quarters. The rise in inflation was also driven by domestic factors, rather than imported prices, providing some evidence that the local economy was already operating at capacity in Q4. Non-tradables inflation was +2.9% y-o-y, while tradables fell -0.3% y-o-y.

Today’s numbers add to the collection of numbers that have surprised the RBNZ on the upside since their last set of published official forecasts (on 12 December). Q3 GDP was higher than the RBNZ expected (+3.5% y-o-y; RBNZ +3.3%) and recent business surveys suggest they are also likely to get an upside surprise in Q4. Dairy prices also appear to have held up better than the RBNZ expected.

As at the mid-December official statement the RBNZ was signaling that they expected to start lifting rates from Q2 2014. The case is strengthening for an earlier hike.

The bugbear in this story is that the NZD has also risen recently, which is likely to continue to concern the RBNZ. However, it may be that the RBNZ needs to get used to a persistently stronger NZD, as the factors that are underpinning local growth are likely to persist. Growth is being supported by three persistent factors: the post-earthquake rebuild in Canterbury, high dairy prices and a housing boom (as we noted in our recent report: ‘New Zealand in 2014: Firing on all cyclinders’, 10 January, link:

Our view remains that rates should rise soon, as the economy is picking up pace and inflationary pressures are likely to build further from here. We expect the first hike to be in Q1, with a January rise now more likely than not.

Bottom line
Inflation surprised on the upside, running at +1.6% y-o-y (market had +1.5%; RBNZ had +1.4%).

Together with a range of demand indicators that suggest growth is picking up faster than the RBNZ expected, we think the case for a near term hike has strengthened.

We continue to expect the RBNZ to hike in Q1 and see a January rate rise as likely.


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