WELLINGTON: New Zealand’s annual inflation accelerated to the fastest pace in more than two years, fanned by soaring fuel prices and bolstering the case for the central bank to execute back-to-back interest rate increases.
The consumers price index (CPI) climbed 4.1% in the second quarter from a year earlier, up from 3.1% in the first quarter and exceeded economists’ estimate of 4%, government data showed yesterday.
Prices advanced 1.5% from the preceding three months, also beating the 1.4% estimate.
The Reserve Bank of New Zealand (RBNZ) had raised the official cash rate (OCR) by a quarter point to 2.5% earlier this month, its first hike in three years, and said it aimed to wind back stimulus at a time of elevated inflation.
The central bank, which anticipated a CPI of 3.9%, expects prices will cool over the next 12 months and return towards the midpoint of its 1% to 3% target band.
“We are hoping that returning the OCR to broadly neutral levels will be sufficient to ensure that inflation settles at 2%,” said Mark Smith, senior economist at ASB Bank in Auckland.
“However, if generalised pricing pressures continue to pick up, there is the risk that the RBNZ may have to use the brake pedal and push the OCR above 3.25% in 2027.”
The kiwi edged higher against the US dollar and the yield on two-year government notes rose two basis points to 3.67% as money markets solidified expectations the RBNZ would raise rates again in September.
Traders also anticipate a follow-up hike in either October or December, and another one in February, according to meeting-linked swaps data.
Most economists expect the central bank will raise rates by another quarter point at the next meeting on Sept 2.
However, there is more uncertainty about how quickly it will move to neutral thereafter, with some suggesting to wait until 2027 for subsequent hikes.
Key to the outlook is how renewed hostilities in the Middle East impact fuel costs and demand.
Last week, RBNZ chief economist Paul Conway said the flare-up in fighting between the United States and Iran suggested upside to the central bank’s inflation projections.
Imported or so-called tradables prices rose 4.9% from a year earlier, picking up from 2.5% in the first quarter, yesterday’s report showed.
The acceleration was led by a 27.5% surge in the price of petrol and a 71% climb in the cost of other fuels, primarily diesel – most of which occurred in the second quarter, the data showed.
Annual non-tradables inflation, a closely watched indicator of domestic price pressures, was 3.4% in the second quarter, slowing from 3.5% in the three months through March. — Bloomberg
