Kiwi tumbles as tepid inflation dashes chance of rate hike

The New Zealand dollar fell 1USc as surprisingly weak fourth-quarter consumer price inflation data dashed expectations the Reserve Bank might lift rates this year rather next. 

The kiwi dropped to 73.29USc as at 12.05pm from 74.30USc immediately before government data showed the consumers price index rose at an annual pace of 1.6% in the December quarter, below the 1.9% pace predicted in a poll of 13 economists surveyed by Bloomberg and the Reserve Bank's projection for an annual rise of 1.8%.

Martin Rudings, senior dealer foreign exchange OMF in Wellington said kiwi got "beaten up" on the very benign inflationary picture and it could fall as low as 72.80 cents over the course of the global trading day as rate hike expectations get pushed out.

According to Rudings, market pricing moved from tipping the first rate increase in November 2018 to the first quarter of 2019 on the data. Meanwhile, ANZ Bank New Zealand senior economist Phil Borkin also said the data led him to push out his expectation for the first rate hike to mid-2019 from November this year. 

The two-year swap rate fell five basis points to 2.17%, a three-week low. 

The Reserve Bank is mandated with keeping annual inflation between 1-3% over the medium term with a focus on the mid-point. However, inflation has remained stubbornly weak, only pushing up to a 2.2% annual pace briefly in the March quarter before dipping back to 1.7% in the June quarter and 1.9% in the September quarter. 

Acting Reserve Bank governor Grant Spencer kept the official cash rate at 1.75% as widely expected at the November review and the central bank’s forecasts show it does not expect to lift rates until mid-2019 at the earliest.

Bank of New Zealand senior economist Craig Ebert said the data "was clearly a surprise to the south" and will keep the Reserve Bank on hold. He said given the central bank was "not on the front foot in talking about normalising policy in November, data like this are hardly going to encourage it to change its tune."

ASB Bank senior economist Jane Turner also said the data reinforces the view that the central bank will remain on the sidelines. "This release suggests that inflation has yet to stage a convincing comeback in New Zealand, outside the housing sector. And, with this release raising numerous questions about the strength of inflation moving forward, it reinforces that there is no need for the Reserve Bank to raise interest rates anytime soon," she said. 

Inflation was lower than expected as higher fuel prices were offset by a slide in food prices and as some major retailers move away from short-term discounts and specials to consistently lower prices for retail goods.

The tradables CPI, which includes goods and services that compete with international rivals, fell 0.3% in the quarter and was up 0.5% on the year.  Non-tradables inflation, which focuses on domestic goods and services, rose a quarterly 0.5% for a 2.5% annual increase.

Economists said the downside surprise was largely in the tradable component, with the most significant declines in clothing, household contents and new car prices. 

Westpac Banking Corp senior economist Michael Gordon said it was "likely that the gains in the New Zealand dollar earlier in 2017 are still flowing through into retail prices of imported products. However, the results also suggest a lack of price pressures in internationally-traded goods as a whole."

Overall, however, the data underscore that "New Zealand’s inflation pulse remains soft" and markets were wrong to price an interest rate hike this year. "We don’t expect any until the second half of 2019," Capital Economics chief Australia and New Zealand economist Paul Dales said. 

(BusinessDesk)