NZ dollar drops after tepid inflation opens path lower

The New Zealand dollar fell about half a US cent after tepid local inflation pushed out the likely timeline for future interest rate hikes and cleared the way for a lower currency.

The kiwi fell as low as 78.63 US cents from 79.09 cents immediately before the inflation data was released, and was recently trading at 78.71 cents.

Statistics New Zealand figures showed inflation was unchanged at 0.3 percent in the three months ended Sept. 30, slowing the annual pace to 1 percent, just within the Reserve Bank’s target band of between 1 and 3 percent, and below analyst expectations for a 1.3 percent rise.

“There’s no need to hike rates any time soon and that frees up the RBNZ to focus on the unsustainable and unjustified currency,” said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. “With this inflation print it’s definitely cleared the way from a New Zealand domestic perspective for another leg down (in the kiwi) – the global legs are still pointing that way but the key is how fearful markets will be after getting wiped out last week for no apparent reason.”

Reserve Bank governor Graeme Wheeler today said the central bank has tried a number of exchange rate regimes over the past 40 years, which have largely unaffected the medium-term level and volatility. The bank has a mandate to intervene in foreign exchange markets when the currency is unjustifiably and unsustainably high, and has a material prospect of succeeding, which has been characterised as smoothing out peaks and troughs in the currency. RBNZ data showed it intervened in August, selling a net $521 million.

Westpac Banking Corp’s New Zealand chief economist Dominick Stephens and economist Michael Gordon said in a note that the Reserve Bank will be “very nervous” about inflation falling to the bottom of the band. The central bank next reviews the official cash rate on Oct. 30.

“With the RBNZ in ‘inflation watch’ mode, and inflation at 1 percent, it is safe to assume that the OCR will not rise for quite some time. We can expect next week’s OCR review to be very dovish,” they said.

Today’s figures showed cheaper household contents and services and communication kept a lid on inflation, while food prices, which account for about 19 percent of the CPI, were flat in the quarter.

Prices of household contents and services fell 1.3 percent in the quarter for an annual decline of 0.4 percent. Retailers increased discounting of furniture and furnishings, carpets, and small household appliances in the quarter.

Communication prices fell 1.4 percent, led by a 7.5 percent drop in prices for telecommunications equipment, which were down almost 25 percent on the year.

Prices for housing and household utilities rose 1 percent in the quarter for an annual increase of 3.4 percent. New housing prices rose 1.1 percent in the three month period, for an annual increase of 4.8 percent, largely driven by booming property markets in Auckland and Christchurch.

House price inflation has been a major concern for the Reserve Bank, which last year imposed restrictions on low-equity home loans to try and quell demand and delay interest rate hikes, with a lack of supply in Auckland and the Canterbury rebuild seen as threatening to spill over into broader consumer price increases.

The tradable component of CPI, which includes goods and services that compete with international rivals, rose at a 0.1 percent quarterly pace, and shrank 1 percent on an annual basis as a strong New Zealand dollar makes imported items cheaper. The non-tradable component rose at a 0.5 percent pace in the quarter, and a 2.5 percent pace on the year.

A 3.8 percent lift in local rates and more expensive housing costs drove the quarterly and annual increases in non-tradable inflation. Electricity prices fell 0.2 percent in the quarter, taking the annual increase to 3.7 percent.

Transport prices rose 0.1 percent in the quarter, and were down an annual 0.5 percent, due largely to a 1.8 percent decrease in the price of petrol from a year earlier.

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