NZD: pressure ramps up on the RBNZ

NZ’s inflation measures showed little easing that the RBNZ was looking for. Indeed,
headline inflation decelerated only slightly and from 7.3% YoY to 7.2% YoY. The
RBNZ had been looking for a pullback in inflation to 6.4% YoY on lower fuel prices.
Ten of the eleven CPI groups showed increases in inflation with food prices,
construction costs and international airfares the largest contributors to higher
inflation. The RBNZ’s sectoral measure of inflation (its measure of core inflation)
jumped from 4.8% YoY to 5.2% YoY and reinforces the broad-based nature of NZ’s
inflation. The inflation data significantly increases the chance of a 75bp rate hike
by the RBNZ in November. While the central bank was the first G10 central bank
to begin raising rates and it has been hiking in 50bp increments, at 3.50% the OCR
is still on the modest side of restrictive, so the RBNZ has to step on the brakes
harder and faster to prevent higher and above-target inflation becoming embedded
in the economy. While the central bank was encouraged by 2Y-ahead inflation
expectations of corporate price setters coming down from 3.29% to 3.07%, they
remain slightly above target and sensitive to a move back higher on today’s
inflation reading. For the NZD, the strong inflation reading will provide support
against the AUD, where the RBA is slowing the pace of its rate hikes. It is worth
noting, however, that the RBA will very likely hike rates twice more this year in
November and December and by 25bp, so the RBNZ, with only one more meeting,
will outpace the RBA by only 25bp. The strong correlation between Australian and
NZ headline inflation suggests Australia’s inflation number will also be strong next
week. Importantly, a strong reading is already expected by the market as well as the RBA given the jump in fuel prices on the back of the reinstatement of the full fuel price levy.

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