Inflation steady at 0.3%, lower than expectated

New Zealand inflation was steady in the third quarter of the year, slowing the annual pace of price increases, and raising the prospect of interest rates staying lower for longer after the data fell short of expectations. The New Zealand dollar fell.

The consumers price index was unchanged at 0.3 percent in the three months ended Sept. 30 from the second quarter, for an annual pace of 1 percent, according to Statistics New Zealand. The quarterly pace was lower than the 0.5 percent expected in a Reuters survey of economists, and below the Reserve Bank's 0.7 percent forecast, opening up the possibility governor Graeme Wheeler will delay the resumption of hiking interest rates. The annual pace slowed from 1.6 percent in the second quarter, and was only just with the central bank's target band of between 1 and 3 percent.

"New Zealand looks ripe for an inflation blow out but the global environment is, fortuitously, conspiring against this," Bank of New Zealand head of research Stephen Toplis said in a note before the release. "Taking all things into consideration, we have thus lowered both our short and medium term inflation forecasts."

BNZ expected the annual pace of inflation to be 1.2 percent this quarter, and economists have been preparing to push out their interest rate expectations on the prospect of tepid inflation.

The New Zealand dollar dropped as low as 78.64 US cents from 79.09 cents immediately before the 10:45am release. It was recently trading at 78.73 US cents.

Today's data showed cheaper household contents and services and communication kept a lid on inflation, while food prices, which account for about 19 percent of the CPI, were flat in the quarter.

Prices of household contents and services fell 1.3 percent in the quarter for an annual decline of 0.4 percent. Retailers increased discounting of furniture and furnishings, carpets, and small household appliances in the quarter.

Communication prices fell 1.4 percent, led by a 7.5 percent drop in prices for telecommunications equipment, which were down almost 25 percent on the year.

Prices for housing and household utilities rose 1 percent in the quarter for an annual increase of 3.4 percent. New housing prices rose 1.1 percent in the three month period, for an annual increase of 4.8 percent, largely driven by booming property markets in Auckland and Christchurch.

House price inflation has been a major concern for the Reserve Bank, which last year imposed restrictions on low-equity home loans to try and quell demand and delay interest rate hikes, with a lack of supply in Auckland and the Canterbury rebuild seen as threatening to spill over into broader consumer price increases.

The tradable component of CPI, which includes goods and services that compete with international rivals, rose at a 0.1 percent quarterly pace, and shrank 1 percent on an annual basis as a strong New Zealand dollar makes imported items cheaper. The non-tradable component rose at a 0.5 percent pace in the quarter, and a 2.5 percent pace on the year.

A 3.8 percent lift in local rates and more expensive housing costs drove the quarterly and annual increases in non-tradable inflation. Electricity prices fell 0.2 percent in the quarter, taking the annual increase to 3.7 percent.

Transport prices rose 0.1 percent in the quarter, and were down an annual 0.5 percent, due largely to a 1.8 percent decrease in the price of petrol from a year earlier.

(BusinessDesk)