Economy

OCR cut more likely on disappointing inflation

Inflation rose just 0.1 percent in the last quarter, largely thanks to the annual tax hike on cigarettes. That brings annual inflation to just 1.5 percent, below the forecasts of both the market and the Reserve Bank.

The disappointing print will put increased pressure on the bank to cut interest rates when it announces its next Official Cash Rate decision in May. 

The New Zealand dollar fell one cent on the news.

The Reserve Bank’s most recent OCR decision dramatically indicated that the next rate movement would likely be down, with the market pricing in 40 basis points of cuts over the next year.

A Bloomberg poll of bank predictions projected an average of 0.3 over the quarter, with annual inflation running at 1.7 percent. The Reserve Bank was slightly closer to the mark, predicting inflation of 0.2 percent over the quarter and 1.6 percent in the year. 

Inflation is measured using the Consumers Price Index, or CPI, which is calculated by looking at price changes of an average “basket” of consumer goods across quarters. 

The last quarter’s inflation was largely down to the annual tax hike on cigarettes, introduced nearly 10 years ago to encourage smokers to quit. The tax meant that an average pack of 25 cigarettes went up by 11.9 percent over the quarter. A packet cost nearly $3 more in March 2019 than it did in December 2018, up to $37.48 from $33.57 in March. 

A single cigarette now costs about $1.50, compared with 54 cents 10 years ago. 

Food prices also saw some inflation, but not as much, rising 1.2 percent. This was largely driven by higher fruit prices, which rose 8.9 percent. 

One of the main contributors to the low inflation print was transportation costs, driven by the low cost of petrol and international airfares. 

Petrol fell 7 percent over the quarter, with the average price of 91 octane sitting at $2.01 a litre. 

This could be set to change in the next quarter, however, as prices rose in March and April. 

Once again, the 'Gull Effect' made sure the most dramatic price falls were reserved for the North Island, excluding Wellington, with a 7.1 percent drop in Auckland, a 7.7 percent fall in the North Island excluding Auckland and Wellington, compared with a 6 percent drop in the South Island and Wellington. 

Looking at the data over the year, inflation is still being driven by high housing and household utilities prices. These rose 3 percent over the year.

The cost of housing rose 2.4 percent over the same time period, and construction rose 3.9 percent. Local authority rates rose by a daunting 5.4 percent. 

The Reserve Bank has a mandate to keep annual inflation between 1 and 3 percent, with an eye to achieving a 2 percent average over the medium-term alongside maximum sustainable employment. 

The most recent OCR decision signalled a cut could be on the way, and today’s data only increased the prospect of a cut.

"Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy," it said. 

This got banks pricing in a cut. Today’s worse-than-expected data could ramp up those calls. 

ANZ chief economist Sharon Zollner said ahead of the release that data in line with her bank’s 0.3 percent projection would affirm that a cut was “not a matter of urgency”, and unlikely to occur at the next decision in May (the bank is still predicting a cut later in the year).

Meanwhile Westpac Bank senior economist Michael Gordon said that a print in line with or below his bank’s prediction of 0.2 percent would support its forecast of an OCR cut in May. 

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