Inflation up 1% in June quarter - higher than expected - pressure on Reserve Bank
UPDATED: Inflation at 1% in the three months to June 30, higher than forecast and at a level likely to put pressure on the Reserve Bank.
UPDATED: Inflation at 1% in the three months to June 30, higher than forecast and at a level likely to put pressure on the Reserve Bank.
UPDATED: TD Securities analyst Roland Randall says headline inflation is very strong and while underlying inflation is more subdued, it is still on the high side.
"Together with the recent better than expected Q1 GDP growth print, this raises the risk that the RBNZ will bring forward rate hikes to 4Q 2011 and we have changed our forecast to reflect this," he said, adding that the market is pricing a little more than 50% chance of a hike by year-end and more than 100% hike by the next meeting in late January.
Inflation is running ahead of forecast, with an increase of 1% for the three months to 30 June announced this morning by Statistics New Zealand.
The consensus market forecast was for a rise of 0.8% for the quarter and 5.5% for the 12 months. (the high annual figure being driven by the one-off GST rise).
The annual figure is the highest since 1990, and sent the New Zealand dollar to 84.79USc up from 84.45USc, but still below the 85USc high of last week.
Driving the inflation numbers were fuel-related costs, with transport prices up 2.7%. Food prices also rose, by 1.1% over the quarter, and housing and household utility prices rose 0.9%, mostly due to electricity price increases.
That takes the annual rate to 5.3% and although some of this can be attributed to the GST rise in October, even if this component is stripped out the annual increase is 3.3%.
Today's inflation figures - which the Reserve Bank had picked to come in at 7% - follow an unexpectedly good GDP result last week, and will put Reserve Bank governor Alan Bollard back in cat-on-a-hot-tin-roof mode.
The difficulty for the Reserve Bank is not just that inflation is now outside the Reserve Bank's target band of 1-3%. The real issue is that this comes at a time the economy was still emerging from recession.
Admittedly, the economy is running stronger than was thought.
Last week's GDP figures, which were 0.8% for the March quarter (average forecast was 0.4%) and included a revision of the December quarter figures from 0.2% to 0.5%.
That takes away the rationale for the OCR to remain at stimulatory levels. It is currently at 2.5%.
Also, in fighting inflation, Dr Bollard has one rather tricky ally - the exchange rate, which hit a record 85USc last week. Running at that level, the currency is keeping imported inflation at low levels.
But it also means the current track for removal of the current stimulus from the OCR will have to be revised.
At present the overnight index swap (OIS) markets have not priced in any increases until December.
Last week's GDP figures meant that looked highly dubious: today's inflation figure makes it even more so. The Reserve Bank is due to review the official cash rate next Thursday morning.