WELLINGTON: New Zealand inflation unexpectedly stayed above the top of the Reserve Bank’s (RBNZ) 1% to 3% target in the first quarter, prompting markets to boost bets on a July interest rate hike as the impact of an expected Iran-war driven surge in fuel prices is still to come.
The consumer price index climbed 3.1% from a year earlier, matching the pace in the fourth quarter and above a forecast 2.9%, Statistics New Zealand data showed yesterday in Wellington.
Prices advanced 0.9% from the preceding three months, also above the 0.8% estimate.
The RBNZ provisionally estimated inflation would accelerate to 4.2% in the second quarter, while local economists reckoned it could push even higher and project it will stay above the top of the target until 2027.
Faced with the risk of stronger inflation becoming embedded in the economy, the central bank is tipped to raise rates sooner than it had previously signalled.
The New Zealand dollar rose 0.4% to 59.12 US cents while the yield on two-year notes jumped eight basis points to 3.5% as traders boosted bets on an RBNZ rate rise.
Markets are now fully pricing a hike in July, up from a three-in-four chance prior to the inflation print.
RBNZ governor Anna Breman said policymakers are concerned that medium-term inflation pressures could be increasing and are prepared to act decisively with rate hikes if that occurs.
Most local economists expect the official cash rate will start to increase in September, although a minority tip a July hike.
Policymakers are mindful that higher prices from the Middle East conflict will also damp household spending on non-essential items and curb hiring, which will slow economic growth.
Oil and natural gas prices soared on Monday after the US Navy seized an Iranian ship during a chaotic weekend that saw Tehran firing at vessels and reimposing controls in the Strait of Hormuz.
The US-Iran conflict has triggered an unprecedented supply shock, intensifying inflationary pressures and weighing on worldwide economic growth.
The cumulative global impact of the war will begin to emerge this week, with business surveys from multiple countries potentially flagging risks of stagflation.
In New Zealand, a report yesterday showed business confidence slumped to its lowest level since mid-2024 in the first quarter.
Firms are indicating they expect to reduce investment and fire workers as rising costs hit profits.
Imported or so-called tradables prices rose 2.5% from a year earlier, slowing from 2.6% in the fourth quarter, the report showed. The pick-up was led by meat and poultry, the statistics agency said.
Meanwhile, annual non-tradables inflation, a closely watched indicator of domestic price pressures, was 3.5% in the first quarter.
This matched the pace in the three months through December.
Electricity and local council land taxes were the largest contributors to the annual inflation rate, the statistics agency said.
Petrol prices rose 3.5% in the quarter while the cost of other fuels and lubricants, which includes diesel, jumped 11%. — Bloomberg
