BNZ tips New Zealand inflation to blow past RBNZ’s own forecast
An inflation print above the RBNZ’s 3.9% projection would strengthen the case for further tightening, reinforcing the higher-for-longer rates narrative already building in NZ swap and bond markets. Traders will watch the core measures as closely as the headline figure, given their weight in the Bank’s policy calculus. A hot core reading would likely extend the recent widening in NZ-global rate spreads and could add support to the New Zealand dollar. Conversely, any downside surprise in the core gauges could temper hawkish repricing even if the headline number beats expectations.
—
BNZ believes New Zealand inflation risk has flipped from capped to uncapped relative to the RBNZ’s own numbers.
Summary:
- BNZ has kept its Q2 CPI forecast unchanged at 4.1% year-on-year, according to the bank’s Markets Outlook note
- The RBNZ cut its own Q2 forecast to 3.9% in July from 4.2% in May, per the same note
- Market pricing sits at 4.0% y/y and 1.4% q/q for the quarter, according to BNZ
- Fuel prices are expected to be the main driver, lifting tradeable inflation to 4.7% y/y, per BNZ’s forecasts
- Core inflation measures are expected to stay above the RBNZ’s target midpoint, according to the note
- BNZ flags Middle East tensions, computer memory costs, New Zealand’s first H5N1 bird flu detection and a strong El Niño pattern as additional supply-side risks, per the report
New Zealand’s Q2 inflation data, due for release today, could deliver an unwelcome surprise for the Reserve Bank, according to BNZ Research’s latest Markets Outlook.
The bank has held its Q2 CPI forecast steady at 4.1% year-on-year, but says the significance of that number has shifted. A month ago, BNZ believed its forecast represented a ceiling on likely outcomes relative to the RBNZ’s own projections. Now, following the central bank’s July Monetary Policy Review, in which the RBNZ trimmed its forecast to 3.9% from 4.2%, BNZ says its figure looks more like a floor.
Market pricing has settled at 4.0% y/y and 1.4% q/q for the quarter. Whatever the final print, BNZ notes it will be sharply higher than Q1’s 3.1% outturn and will sit well outside the RBNZ’s target band.
Fuel prices are identified as the dominant driver, with BNZ forecasting a 1.5% quarterly lift in prices overall and tradeable inflation surging to 4.7% annually. Household energy costs are also expected to climb, partially offset by falling domestic and international airfares.
Core inflation gauges, including the trimmed mean, weighted median and CPI ex food and energy, are expected to stay above the midpoint of the RBNZ’s target range, though marginally softer than last quarter.
BNZ also flags a lengthening list of supply-side risks beyond fuel: escalating Middle East tensions, rising computer memory costs feeding into technology goods prices, the first-ever New Zealand detection of H5N1 bird flu, and a strong El Niño pattern that could hit both local food production and global food prices.
Stats NZ and the RBNZ’s Sectoral Factor Model, which printed 2.7% y/y last quarter, are both due out today, at 10:45am and around 3pm respectively (all NZ time), and will shape the debate over whether the Reserve Bank needs to keep tightening.
Earlier:
This article was written by Eamonn Sheridan at investinglive.com.