Recent soft New Zealand economic data including; business surveys and the September inflation numbers has led financial markets to price in a cut to the official cash rate by early next year. Inflation data showed a 0.8% rise in consumer prices over the last year which is below the RBNZ target band for inflation of between 1.0% and 3.0%. However, much of the reduction in the inflation rate has been due to the high $NZ reducing the price of imports with tradeable prices (those impacted by the currency) falling 1.2% over the last year. The non-tradeable component which measures domestic price pressures has risen 2.3% over the last year with the cost of home ownership including rents, rates and insurance increasing 2.8% over the year. Looking forward economists expect inflation to rise as the impact of the high $NZ fades and rising food and oil prices flow through to consumer.
On balance we do not think that the Reserve Bank will reduce rates in the near term given our expectation of moderate growth and inflation and recent rises in house prices. An unknown however, is the approach of the new Reserve Bank governor Graeme Wheeler who may be more bearish or bullish on economic growth and inflation than the outgoing Alan Bollard. His first monetary policy announcement on the 25th of October will therefore be closely watched by financial markets.
Jonathan Windust
Portfolio Manager