WELLINGTON: New Zealand inflation likely eased slightly in the third quarter, but the respite is set to be short-lived as a weaker currency and surging oil prices drive an acceleration in the final three months of the year, building the case for rate hikes.
A report tomorrow will show the consumer price index rose 3.8% in the third quarter from a year earlier, according to the median estimate in a Bloomberg survey of 16 economists.
That’s down from 4.1% in the second quarter and slightly less than the Reserve Bank of New Zealand (RBNZ) projected in the early September monetary policy statement.
A lot has changed since governor Anna Breman and her Monetary Policy Committee (MPC) colleagues hinted in that September document that they may pause to gauge how their back-to-back rate hikes in the third quarter would impact the economic recovery.
Renewed hostilities in the Middle East have seen global fuel prices move higher, driving New Zealand pump prices above their April highs, while the New Zealand dollar is about 4% lower than the average level the RBNZ assumed for the fourth quarter.
Local economists now expect inflation will accelerate in the fourth quarter, potentially as high as 4.7%.
The RBNZ projected 3.9%.
That is building pressure on the RBNZ to respond by raising the official cash rate (OCR) by 25 basis points to 3% at its next meeting on Oct 28, economists say.
“When the world changes you must change with it,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington.
“The world is now in a very different place to what the RBNZ had anticipated and so it should adjust accordingly.”
Investor pricing of an October hike has lifted to an 81% chance from 56% at the start of last week, swaps data showed Monday in Wellington.
There is a one-in-two likelihood of another quarter-point hike in December, the data show.
Toplis forecasts fourth-quarter inflation will hit 4.7%, which would take the measure to a three-year high and outside the RBNZ’s 1% to 3% target until late next year.
Monthly data for September last week indicated price pressures are broad based and may be more persistent than expected, said ASB Bank acting chief economist Kim Mundy.
ASB forecasts inflation will accelerate to 4.5% in the fourth quarter and won’t drop below 3% until late 2027.
“Last week’s data made us less confident in the argument that spare capacity, alongside a neutral OCR, will be enough to return inflation sustainably to the 2% midpoint of the target,” she said.
“We expect two 25 basis point hikes by year end, but risks are skewed to the OCR pushing above 3.25% in 2027.”
The RBNZ isn’t scheduled to publish fresh inflation forecasts until December but chief economist Paul Conway told Bloomberg last week that there was upside risk to its fourth-quarter outlook because of oil prices and the currency.
He added the direction for interest rates “is most likely up” but said the October decision remains “wide open.”
“We wanted to have the option of doing a zero or a 25, and I think we’ve got that on the table,” he said.
Toplis said there is a risk to medium-term price pressure unless policymakers react early.
“We believe the RBNZ will not only need to raise its cash rate in October but should also signal there is more to come,” he said.
“Returning inflation to 2% will become increasingly difficult if the MPC displays the sort of reticence to raise rates that it did in September,” he said. — Bloomberg
