By Lucy Craymer
WELLINGTON (Reuters) -New Zealand’s consumer inflation slowed to a two-year low in the third quarter, reducing expectations that the central bank will hike the cash rate further in November and prompting a fall in the New Zealand dollar.
Consumer prices rose 5.6% year-on-year in the third quarter, slower than the 6.0% increase in the second quarter, Statistics New Zealand said in a statement on Tuesday. The data was slightly lower than economists’ expectations of a 5.9% annual rise in a Reuters poll.
While inflation remains well above the Reserve Bank of New Zealand’s (RBNZ) target of 1% to 3%, the reduced inflationary pressures has made an interest rate hike less likely at the central bank’s policy meeting in November, according to the market and analysts.
Two-year swap rates fell 5 basis points to 5.61% as the market pared the chance of a hike in November to 20% from 33% before the data. The New Zealand dollar slipped 0.4% to $0.5905 following the data.
“Overall, the RBNZ will be comforted by this combination of results. That said, they are probably still nervous on the
stickiness of core inflation,” Westpac economists said in a note.
“We think the RBNZ will be happy to sit on their hands in November and see how the economy and inflation evolves through the summer period.”
Inflation is a significant challenge for the RBNZ and it has responded by raising interest rates to 5.5% from a record low of 0.25% in October 2021.
The central bank has said rate increases are having the desired impact on dampening inflation, although the cash rate will have to remain at this restrictive level for some time to ensure inflation returns to the target range.
Westpac and ANZ have both pushed back expectations of a 25 basis point rate hike from November to February.
ASB Bank Senior Economist Mark Smith said in a note that many of the near-term inflationary risks identified by the RBNZ look to be crystallising, with higher prices for fuel, public transport, local authority rates, alcohol and insurance impacting the third-quarter figures, though there were also some encouraging signs.
“Growing spare capacity in the labour market, the fickle global scene, and tightening financial conditions suggest that the hurdle to an (official cash rate) hike in the coming meetings remains high,” he said.