Accelerating inflation isn't expected to sway the Reserve Bank from a March rate hike, as rising consumer prices firm up the outlook of a strengthening economy.
Markets were surprised at the strength of today's inflation data, with the New Zealand dollar climbing 0.8 percent after Statistics New Zealand said the consumers price index increased 0.1 percent in the three months ended Dec. 31, slowing from a quarterly increase of 0.9 percent, according to Statistics New Zealand.
That was against a forecast decline of 0.1 percent in a Reuters survey of economists and the Reserve Bank's expectation of a 0.2 percent fall. The annual pace of inflation was 1.6 percent, its fastest pace since March 2012 and slightly ahead of forecasts.
"This cements where we were heading - that the bank signalled its move to raise rates when needed," said Robin Clements, economist at UBS New Zealand in Christchurch. "It makes it (the Reserve Bank) more comfortable in its approach to go through all the reasons of its outlook when it comes out in March, and next week sets the path towards that."
Central bank governor Graeme Wheeler had previously indicated he will start hiking the 2.5 percent official cash rate this year to head off the threat of future inflation as the Auckland and Christchurch property markets continue to bubble and as the Canterbury rebuild gathers momentum.
Traders are pricing in a 26 percent chance of a rate hike, according to the Overnight Index Swap curve.
Chrstina Leung, an economist at ASB, said the 0.5 percent decline in tradable inflation, which includes goods and services facing international competition, was less than what the Reserve Bank was picking, while non-tradable inflation was in line with expectations with an increase of 0.5 percent.
"We continue to expect the RBNZ will wait until March to raise the OCR, although we now see the probability of a January OCR increase as slightly higher now (25 percent, up from our pre-CPI view of 20 percent probability)," Leung said in a note. "Although NZ inflation is contained for now, the OCR will need to be increased before long as demand improves and brings a lift in underlying inflation pressures over the coming year."
The quarterly increase was driven by a 12 percent rise in the price of international airfares, the biggest quarterly gain in four years, and a 6.7 percent increase in domestic flights.
Prices for housing and household utilities rose 0.5 percent with a 1.1 percent rise in the cost of new housing and a 1.6 percent increase in property maintenance services. Prices for milk cheese and eggs advanced 4.2 percent in the quarter.
Those were offset by a 20 percent drop in the price of vegetables and a 3.5 percent decline in the price of petrol.
The annual pace of inflation, which stayed in the Reserve Bank's target band of between 1 percent and 3 percent, was driven by a 3.2 percent increase in housing and household utilities, with a 4.7 percent increase in new housing prices, a 2.1 percent rise in rental prices, 4.3 percent increase in property maintenance, and a 3 percent rise in electricity prices. Petrol prices for an annual 0.9 percent
Prices for clothing and footwear fell an annual 1.4 percent, led by cheaper women's clothing, clothing accessories and men's footwear, and 2.8 percent decline in the annual price of communications was led by a 21 percent slide in prices for telecommunication equipment.
The level of discounting in the quarter was unchanged at 15 percent of prices discounted from the September period.