15 Apr 2014
New Zealand CPI preview - RBS
FXStreet (Bali) - Greg Gibbs, FX Strategist at RBS, shares his view on the New Zealand CPI release, due on Wednesday at 22.45 GMT, nothing that recent economic activity suggests inflation should continue to rise.
Key Quotes
"The RBNZ forecast path, obviously now with a wide confidence band, implies significantly more hikes than implied by the market. It sees a steady tightening cycle continuing albeit at a diminishing pace, taking rates to reach over 5.0% in around 2 years (the market sees a peak in cash rates at around 4.5% in around 2 years)."
"This might be considered a tight policy with the neutral cash rate likely to be nearer 4.25/4.50% (given an inflation target of 2.0%, trend GDP growth rate of around 2.5%, and a higher spread between cash and lending rates in the economy post regulatory changes in the wake of the 2008 GFC). Considering the NZD is also likely to be historically high, it further emphasises the potential policy tightness in the RBNZ projection."
"The RBNZ has virtually given up trying to jawbone the NZD lower, considering its outlook for rising rates, but it still consistently projects the TWI at somewhat lower than current levels. So the market might be assuming the high NZD does more of the tightening work than the RBNZ does. The NZD TWI is currently at a record 80.5. The RBNZ's peak year average forecast is 78.3 in 2015."
"Back to the CPI release (due on Wednesday), the RBNZ 13 March MPS forecast headline CPI rising from 1.6%y/y in Q4-2013 to 1.7%y/y in Q1-2014. This is in line with the market projection. The RBNZ then projected a further jump in the CPI to 2.0% in Q2 (its inflation target), and creeping above this target to around 2.1% over the medium term across its three-year horizon."
"Inflation has been rising across a variety of headline and underlying measures since mid-2013. The jump from the lows in the headline and trimmed and weighted median in mid-2013 has been quite sharp. Although the RBNZ's preferred statistical measure of underlying inflation (sectoral model) has been smoother."
"The continuing strength in most activity indicators in New Zealand suggests inflation should indeed continue to rise. House prices resumed their surge in March (notwithstanding cooling house sales) to be up 3.4%m/m and 9.2%y/y. However, one area likely to keep inflation down is the strong NZD pushing down tradable goods prices and driving spending towards cheaper imports."
"The NZD has trended higher for several years, and this will continue to weigh down on prices over the year ahead. The experience in Australia during its strong currency years was that the pass-through to domestic inflation tended to occur later and be more prolonged than first expected."
"We have no strong bias to see a lower-than-expected inflation outcome, but a growing perception that the rise in the NZD will be more prolonged resulting in a more permanent shift in relative prices may over time have a bigger dampening impact on the New Zealand economy and inflation."
Key Quotes
"The RBNZ forecast path, obviously now with a wide confidence band, implies significantly more hikes than implied by the market. It sees a steady tightening cycle continuing albeit at a diminishing pace, taking rates to reach over 5.0% in around 2 years (the market sees a peak in cash rates at around 4.5% in around 2 years)."
"This might be considered a tight policy with the neutral cash rate likely to be nearer 4.25/4.50% (given an inflation target of 2.0%, trend GDP growth rate of around 2.5%, and a higher spread between cash and lending rates in the economy post regulatory changes in the wake of the 2008 GFC). Considering the NZD is also likely to be historically high, it further emphasises the potential policy tightness in the RBNZ projection."
"The RBNZ has virtually given up trying to jawbone the NZD lower, considering its outlook for rising rates, but it still consistently projects the TWI at somewhat lower than current levels. So the market might be assuming the high NZD does more of the tightening work than the RBNZ does. The NZD TWI is currently at a record 80.5. The RBNZ's peak year average forecast is 78.3 in 2015."
"Back to the CPI release (due on Wednesday), the RBNZ 13 March MPS forecast headline CPI rising from 1.6%y/y in Q4-2013 to 1.7%y/y in Q1-2014. This is in line with the market projection. The RBNZ then projected a further jump in the CPI to 2.0% in Q2 (its inflation target), and creeping above this target to around 2.1% over the medium term across its three-year horizon."
"Inflation has been rising across a variety of headline and underlying measures since mid-2013. The jump from the lows in the headline and trimmed and weighted median in mid-2013 has been quite sharp. Although the RBNZ's preferred statistical measure of underlying inflation (sectoral model) has been smoother."
"The continuing strength in most activity indicators in New Zealand suggests inflation should indeed continue to rise. House prices resumed their surge in March (notwithstanding cooling house sales) to be up 3.4%m/m and 9.2%y/y. However, one area likely to keep inflation down is the strong NZD pushing down tradable goods prices and driving spending towards cheaper imports."
"The NZD has trended higher for several years, and this will continue to weigh down on prices over the year ahead. The experience in Australia during its strong currency years was that the pass-through to domestic inflation tended to occur later and be more prolonged than first expected."
"We have no strong bias to see a lower-than-expected inflation outcome, but a growing perception that the rise in the NZD will be more prolonged resulting in a more permanent shift in relative prices may over time have a bigger dampening impact on the New Zealand economy and inflation."