Inflation in New Zealand fell to the lowest level since 1999 as the annual rate of increase in the consumer price index declined to 0.1% in the final quarter of 2015. Expectations were for the inflation rate to stay unchanged at 0.4%. On a quarterly basis, CPI fell by 0.5% from the previous quarter, sharply below forecasts of a 0.2% fall. The drop was mainly attributed to an 8.1% decrease in petrol prices.
The sharper-than-expected drop in inflation puts the Reserve Bank of New Zealand (RBNZ) back in focus which cut rates just last month. The RBNZ reduced the borrowing rate four times in 2015 from 3.5% to 2.5%. However, the last move in December was seen as a hawkish cut. The RBNZ’s Governor, Graeme Wheeler said at the last meeting that inflation was on track to move to the Bank’s 1-3% target range and was worried about the housing bubble in Auckland.
Economic growth has been fairly robust during 2015 with quarterly GDP growth accelerating from 0.2% in the first quarter to 0.9% in the third quarter. A sharp depreciation in the exchange rate of the New Zealand dollar has helped exports by offsetting some of the impact from falling dairy prices and weak demand from China.
The New Zealand dollar dropped to a 6½-year low of 0.6140 against the US dollar during the market turbulence in August 2015 but had recovered to 0.6896 by October as global markets rebounded and the RBNZ struck a more hawkish tone. However, the RBNZ’s forecasts for inflation rising to 1.2% in the first half of 2016 may be too optimistic given the ongoing falls in commodity prices and a bad start to the year for dairy prices.
The Global Dairy Trade (GDT) price index fell by 1.6% in the first auction of the year on January 6 and by 1.4% on January 19. This has put renewed pressure on the kiwi as dairy is New Zealand’s largest export. The slowdown in China and in other emerging economies is also likely to weigh on New Zealand’s economy in 2016. Analysts are now expecting that the RBNZ will cut rates a further two times by 25bps each by the end of the year.
The kiwi extended its losses to 0.6362 against the US dollar in European trading, takings its decline since the start of the year to 7%. Against its Australian counterpart, the AUD/NZD pair was slightly down on yesterday’s close at 1.0765.
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