Westpac Institutional Bank Team
Westpac Institutional Bank
Consumer price inflation increased by more than expected in September, rising to an annual rate of 1.9%. That's much higher than the RBNZ was expecting, and it's likely that we'll see inflation push even higher over the next few quarters. Economic activity has also been firmer and the NZ dollar is lower. Against this backdrop, the chances of a near-term rate cut from the RBNZ have diminished. Nevertheless, interest rate hikes are still a long way off, with the Official Cash Rate set to remain on hold for some time yet.
Back in August there was a marked dovish lurch by the Reserve Bank. The RBNZ signalled that it expected to keep the Official Cash Rate at a low level for much longer than it had previously assumed. In addition, the accompanying policy statement and related media comments signalled that if activity and inflation did not firm as they expected, the OCR could be cut.
We took this signal from the RBNZ seriously, and based on economic conditions at the time we put the odds of a rate cut at one-in-three. However, we felt it was more likely that both inflation and economic activity would surprise to the upside of the RBNZ's downbeat near-term forecasts, and those conditions would prevent a cut. That is very much the way things have played out.
Looking first at inflation, the September quarter saw consumer prices rising by 0.9%, to be up 1.9% over the year. That was stronger than the 0.7% increase that we and other analysts were expecting. Importantly, it was well above the 0.4% rise that the RBNZ had factored into their August Monetary Policy Statement forecasts.
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