FYI | Jul 17 2007
By Chris Shaw
Having previously applied only a 40% chance of a further increase in official interest rates in New Zealand this month the market is revising its estimates after stronger than expected June quarter inflation data.
According to GSJB Were the market is now pricing in a 68% chance of a hike when the Reserve Bank of New Zealand (RBNZ) meets later this month as it attempts to bring inflation under control, the situation made more difficult by a June quarter outcome of 1.0% inflation growth against market expectations of a 0.8% increase.
Macquarie Equities points out the main contributors to the stronger than expected outcome were rising petrol prices and strength in the housing and utilities sector, though as JD Securities senior strategist Joshua Willaimson noted if petrol prices were not included inflation only rose 0.6% for the period.
This doesn’t offer much relief however as the RBNZ has already indicated it would look through the impact of petrol prices and focus on non-tradeable inflation, Williamson pointing out this is already high at around 4.1% year-on-year.
The good news in his view is inflation remains within the RBNZ’s target band of 1-3%, while expectations are the increase in official rates in June will slow the economy further.
This may ease inflationary pressures, though Macquarie still sees some risks given the stronger CPI data and recent stronger than expected retail sales data for May suggesting activity and domestic pricing pressures have yet to ease since the RBNZ started hiking rates in March.
There have already been three increases in official rates this year, bringing the cash rate to 8.0%. According to GSJB Were this creates some issues for the RBNZ as it means the inflation starting point is problematic from a monetary policy perspective, but with the high level of rates likely to slow the economy going forward there should be an easing of inflationary pressures.
In Macquarie’s view the housing sector continues to be a threat and may force the RBNZ into further action, as housing prices are responding to stronger market activity. The concern is this will flow through into higher rents given the link with property prices, though the economists suggest the recent rate increases may take some of the heat out of the sector.
Despite the market giving better than a 50% chance of a hike this month GSJB Were continues to see such a move as unlikely, a view shared by UBS. The broker suggests monetary conditions are already tight enough and signs are emerging momentum in the economy will likely falter in the months ahead, meaning maintaining a tightening bias should be sufficient at the current time and no hike will be needed this month.
No doubt the CPI surprise across the Tasman will keep investors in Australia on the edge of their seats when the next Australian CPI release is due on the morning of the 25th July.