By Bernard Hickey
Consumer price inflation edged up to an annual rate of 0.3% in the June quarter, largely because of an 8.8% rise in petrol prices and a 0.7% rise in the cost of housing and household utilities.
But core domestic inflation remained very subdued and low enough to allow the Reserve Bank to cut interest rates another three times in the next 105 days, most economists said.
Non-tradable inflation, which reflects local price setting behaviour and is closely watched by the bank, was 0.1% for the quarter and just 2.0% from the same quarter a year ago. This was the lowest level of core domestic inflation in 14 years. There would have been no annual inflation without the 2.3% rise in rents and the 5.3% rise in the cost of new homes.
Economists said core domestic inflation remained too weak for the Reserve Bank to ignore, locking in expectations for another 25 basis point cut in the Official Cash Rate to 3% next Thursday. The New Zealand dollar dropped further to a fresh five year low of 65.8 USc, having earlier dropped 1 cent after a fresh 13% fall in wholemilk powder prices.
Westpac Chief Economist Dominick Stephens said there was even a chance of a 50 basis point cut either next Thursday or on September 10.
Statistics New Zealand reported inflation in the Consumer Price Index of 0.4% in the June quarter, which was in line with the Reserve Bank’s forecast and up from a 0.3% fall in the March quarter.
The annual inflation rate rose to 0.3% from 0.1%, but remains well below the 2% mid-point of the Reserve Bank’s 1-3% target band and is not expected to stop it from cutting the Official Cash Rate again next Thursday.
The result was a touch weaker than the consensus economist forecast for quarterly inflation of 0.4%, although the annual result was in line with expectations.
“Without petrol, the CPI was flat for the quarter,” Statistics NZ prices manager Chris Pike said
Prices for the housing and household utilities group rose 0.7% in the June quarter from the March quarter, while prices for newly built houses excluding land were rose 1.5%, including rises of 2.8% in Auckland and 0.7% in Canterbury. In the year to the June 2015 quarter, prices for newly built houses excluding land rose 7.6% in Auckland and 4.0% in Canterbury.
Rents rose 0.6% nationally in the quarter, with rises of 0.8% in Auckland and 0.7% in Canterbury. Rents rose 2.9% over the last year in Auckland and 3.5% in Canterbury.
Domestic airfares fell 13% in the quarter and were down 3% from a year ago, while telecommunications services fell 1.9% in the quarter.
Tradeable goods and services prices fell 2.0% for the year, while non-tradeable prices rose 2.0%, which was the smallest increase since the December 2001 quarter.
Non-tradable goods and services increased 2.0%, which was the smallest annual increase since the December 2001 quarter. The main contributor was cigarettes and tobacco prices, which rose 14% due to excise duties rising in January 2015.
ANZ Senior Economist Mark Smith said non-tradeable inflation was soft outside of housing.
“The soft print for non-tradable inflation in particular – despite solid economic growth over the past year – provides further evidence that we are in a period of structurally low inflation,” Smith said.
“We expect the run of low inflation to continue despite the lower NZD, paving the way for the OCR to adjust to reflect the weaker growth outlook. We expect the RBNZ to fully unwind its 2014 hikes, with the OCR set to return to 2.5%,” he said.
Stephens said there was no impediment to the RBNZ reducing the OCR rapidly in response to plunging dairy prices and faltering domestic economic confidence.
“We are currently forecasting 75 basis points worth of OCR cuts over the remainder of this year, but after considering both of today’s developments we may shift to forecasting even deeper OCR cuts this year,” Stephens said.
Financial markets were currently pricing 25 to 50 basis points worth of OCR cuts by September, but “we think they should be pricing 50bp to 75bp worth of cuts, reflecting a risk that the RBNZ cuts the OCR by 50 basis points in either July or September.”
ASB Senior Economist Jane Turner said the result was marginally below market forecasts, but the weaker non-tradable inflation was a concern.
“Growth is likely to be weaker over 2015 than the RBNZ (and ourselves) previously expected. In addition, there is evidence of strong competition in key sectors,” Turner said.
“As a result, it’s likely that non-tradable inflation will remain fairly subdued, which reinforces the case for further rate cuts this year. We continue to expect the RBNZ to cut the OCR by 25bp apiece next week, in September, and in October, to a low of 2.5%.”
(Updated with more detail, chart, market reaction, economist reaction)