When RBNZ cut interest rates to 2.5% in December they suggested the rate cut cycle, for the foreseeable future at least, had come to an end. Naturally this resulted in a sharp advance for the Kiwi crosses into the year end with NZDUSD closing the year at a 12-week high.
Within the December and January minutes RBNZ released their expectation for inflation to pick up in early 2016.
This month's PPI has been dragged down by 'prices paid' and 'price received' by producers and prices paid by farmers.
As we are looking at the early stages of the value china then inevitably, lower costs at pruduction will lead to lower consumer prices at the retail end. So if this pattern persists I see little chance of RBNZ heading back toward s2% inflation this year.
The index focuses on producer inflation but we can see it tends to move in tandem with Core CPI (consumer inflation), so when we see that both have contracted together and see inflation expectations have also softened, then we have to revisit the notion that RBNZ may cut again.
On RBNZ's website they state that since 2000 inflation has average 2.7%, up from the 2.4% since the 1990s. However in a world of low growth I strongly suspect they will have to be yet another bank to lower their expectations (and target band) over the coming years as they adjust to global disinflation. Central Bank undershooting their targets will remain a common theme until they lower their own expectation of what is achievable and I see RBNZ as being no exception.
So looking at the data above and below I believe it to be inevitable that RBNZ will have to cut twice more this year.
Here we can see the terms of trade for Q4, with recent softness being blamed for low inflation. Whilst annualised (YoY) it remains elevated the monthly read suggests this may top out over the coming months, and continue to drag the index down. If this is the case and PPI continues to undershoot, then RBNZ may have to get ahead of the curve and cut in Q2 once more.
All that would be required is the bullish theme for Greenback to return and we then have the case for a lower NZDUSD. The caveat here however is if FED do back-track and provide no further rises this year, or taking it a step further, talk of a rate cut. This would be catastrophic for both RBNZ and RBA who would likely have to cut to reduce the yield spread between the economies to lower the chances if hot money flooding in to prop the currency up.
Inflation not on track with RBNZ's expectaions
Whilst it is early days, the combination of lower producer prices, inflation and expectation of inflation has seen me return to the notion of an RBNZ rate cut sooner than later.