New Zealand reported QoQ inflation of 0.8% in the first quarter, down from 2.3% in the December quarter last year, and below consensus forecasts of 1.0%. This placed the annual inflation rate at 4.5%, up from 4.0% in the previous quarter. Broken down, tradeables inflation was 0.5% QoQ and 3.7% YoY, while non-tradeables inflation (i.e. goods that do not face foreign competition) was 1.1% QoQ and 5.2% YoY.
New Zealand is still seeing the one-off effects of a series of regulatory changes on its inflation rate, e.g. an increase of the sales tax (GST or Goods and Services Tax), and increases in ACC levies etc. Meanwhile the tradeables figure - susceptible to global commodity prices - has been partially headed off by the strong New Zealand dollar, which is riding strong on high terms of trade (boosted by strong dairy and agricultural commodity prices).
The Reserve Bank of New Zealand [RBNZ] is likely to find some comfort in the results as it ponders the time to re-start its tightening cycle. Prior to the tragic earthquakes in September last year and February this year the RBNZ had hiked rates by 25bps twice to 3.00%, but dropped the rate 50bps to 2.50% following the worst of the Christchurch earthquakes in February.
The market expects the RBNZ to begin tightening as soon as December this year, but a lot will depend on the rebuilding efforts in Christchurch and how quickly the economy recovers. But there are upside risks to inflation, with the potential for second round effects from the one-offs and rising commodity price impacts, as well as the major rugby world cup event that will take place in New Zealand this year.
Already the New Zealand Dollar, or 'Kiwi' (BNZ) as it is known by most, has begun to respond to the possibility of higher interest rates. Over the past week the Kiwi climbed roughly 200 pips or 2 cents, barely touching 0.80 against the US dollar, before falling back to the low 0.79's following the release of the inflation data.
The outlook for the New Zealand economy is slowly improving, with credit conditions easing, one-offs such as the rugby world cup, and stimulatory policy conditions set to support the economic recovery. While the housing market is showing some signs of improvement, the labor market is still relatively sluggish, and consumer spending has been capped somewhat as a result of this and the deleveraging cycle.
Thus a more robust recovery will need to be driven by business spending and investment, and in particular: exports. As it is also an election year, there is a certain degree of uncertainty; however it is looking likely that the pro-business National Party will remain in power, which may mean some partial privatization of State Owned Enterprises in coming years. This will likely be good for the local share market, the NZX, which is still trading on relatively attractive valuations, particularly when it comes to dividend yields.
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