Summary

• CPI moves up by 0.8% in the first quarter and 1.5% for the whole year.
• Current rise in inflation is due to housing prices and transport.
• RBNZ to keep a close watch but keep the interest rates unchanged till inflation reaches 2% annualised.

New Zealand’s Consumer Price Index (CPI) has moved up by 0.8% in Q1, much above the forecast of 0.7%. The annual inflation was also above expectations at 1.5% as compared to 1.4% the previous year.  

While this is being seen as a good sign, economists are still skeptical about it being enough for the Central Bank to consider raising the interest rates.

Even though the CPI rose by 0.8 percent and the annual inflation is showing a 1.5% rise, it is still below the Reserve Bank of New Zealand’s (RBNZ) mid-point target of 2%.   

CPI numbers mainly driven by housing

The acceleration in inflation is mainly led by the growth in the transport and housing prices, but other sectors are still subdued. The economists, therefore, feel that the outlook is still uncertain and the RBNZ will keep the interest rates unchanged for a while.

It may be recalled that RBNZ had kept the interest rates low, saying that the target rate for inflation was still way off. In Its last Monetary statement on 14 April, it had said that the Central Bank would continue with its current monetary stimulus till the employment and inflations targets were met.
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It is expected that the RBNZ would keep a close watch on medium-term inflationary drivers for the signs of the economic recovery and then decide on the interest rate increase. With new inflation numbers, a decrease in the OCR seems unlikely. In fact, it’s too early to predict whether consumer price inflation can be steady at 2%.

RBNZ likely to keep interest rate unchanged

Economists are no doubt speculating whether the RBNZ would lift the official cash rate (OCR) or not. Even though the RBNZ had made its policy stance clear in the previous Monetary Statement, some are still hoping that the bank would raise the OCR in the next monetary review in view of better CPI numbers. They feel that the government’s monetary support should end as the economy is well on the path of recovery in NZ.

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In its last policy statement, the RBNZ had made it clear that the overall baseline economic activity was weak, and the quantitative easing and other supports were needed. It had also stressed that the interest rates would remain low till the consumer price inflation reached a 2% per annum and employment was above its maximum sustainable level.

Current increase in CPI is largely driven by the NZ Housing market. The data released by StatsNZ reveals that home rents have risen by 1% in the last quarter, while the cost of building a new property has also moved up. Transport prices also rose by 3.9%, the biggest quarterly jump in a decade.

Also Read: Will NZ economic activity gather momentum in March quarter?

The New Zealand dollar was slightly weaker at $0.7162 after reaching one-month high of $0.7227 on Tuesday.