New Zealand inflation hits 32-year high, raising bets on sharper rate hikes

The New Zealand dollar rose after the release of the data. PHOTO: REUTERS

WELLINGTON (REUTERS) - New Zealand’s consumer prices rose at their fastest pace in three decades, beating forecasts and raising the prospect of an unprecedented 75 basis point interest rate hike at the central bank’s policy meeting next month. 

The consumer price index (CPI) increased 7.3 per cent in the second quarter, speeding up from a 6.9 per cent gain in the first quarter and the fastest since the June quarter of 1990 when prices rose 7.6 per cent, Statistics New Zealand said in a statement on Monday (July 18). The index rose 1.7 per cent quarter-on-quarter, slightly slower than the 1.8 per cent rise in the first quarter. 

The inflation readings were above economists’ expectations in a Reuters poll for a 1.5 per cent rise for the quarter and a 7.1 per cent annual gain. 

The New Zealand dollar shot up 0.5 per cent and the two-year swap rate rose 11 basis points to 4.15 per cent after the data, on growing expectations the central bank will again hike rates at its August meeting.

Most economists expect the Reserve Bank of New Zealand (RBNZ) to raise rates by 50 basis points next month but the hotter-than-expected inflation has raised the possibility the bank may follow global peers in delivering a supersized hike. 

The RBNZ last week raised its official cash rate to 2.50 per cent, the latest in a series of hikes that has taken the benchmark from a record low 0.25 per cent in October last year. The bank has also signalled plans to increase the rate to 4.0 per cent by the middle of 2023. Prior to the inflation data, most economists had not expected the bank to go that far. ANZ now expects the run of 50 basis point hikes to continue through to November, meaning a cash rate endpoint of 4.0 per cent rather than 3.5 per cent.

New Zealand is among a host of central banks racing to get ahead of surging global inflation, which is driven by supply constraints caused by the war in Ukraine and the Covid-19 pandemic. Last week, Singapore and the Philippines surprised markets with out-of-cycle monetary policy tightenings while Canada delivered a much larger than expected 100 basis point rate hike. 

Westpac Bank said in a note that much of the strength in consumer prices has been due to large increases in the costs of food, petrol and housing although it noted high inflation is broadbased. “Price pressures have been boiling over in every corner of the economy,” it added. 

Inflation and the impact it has had on a households in New Zealand have become a political issue. The government on Sunday moved to offset some of the inflationary pressures by extending the various breaks on fuel excise taxes, road user charges and public transport fares. 

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