New Zealand Inflation Still High

New Zealand's inflation accelerated at a faster-than-expected pace in the second quarter, data Monday showed, sending the currency to 22-year highs and raising the likelihood of an interest rate hike.

The consumer price index rose 1 percent in the three months ended June 30 from the previous quarter and was up 2 percent from the same period a year earlier, according to Statistics New Zealand.

The result was above market expectations of a 0.8 percent on-quarter rise in CPI and a rise of 1.8 percent on year. The central bank had forecast a 0.7 percent quarterly increase and a 1.7 percent rise on year.

"It's very strong and strong in all the wrong places from the (Reserve Bank's) point of view," said Nick Tuffley, chief economist at the ASB Bank in Auckland.

"This has raised the odds of an interest rate increase. It's looking like a pretty fine call," for the July 26 cash rate review, he said.

Non-tradable, or domestic inflation - which excludes import prices - rose 1.1 percent on the previous quarter and 4.1 percent on year. This compares with 1.2 percent on quarter and 4.1 percent on year in the first quarter.

Market reaction was swift with the New Zealand dollar rising to a fresh 22-year peak of US$0.7894 (euro0.5728) from US$0.7861 (euro0.5705) just prior to the inflation data. It had fallen back to US$0.7863 (euro0.5707) at 0030 GMT.

The money market has significantly raised the chance of an interest rate hike next week, pricing in a 70 percent risk of a 25 basis point increase from just under 50 percent before the CPI report.

The bank raised its key rate in March, April and June by a total of 75 basis points, to a record high 8.00 percent, aimed at knocking back domestic demand and cooling inflation pressures that it expects to gain momentum over the medium term.

Data since the Reserve Bank's June 7 policy review have broadly supported policymakers' tightening bias, with no clear-cut evidence that underlying inflation is slowing sufficiently.
Source : http://www.forbes.com