New Zealand: CPI to be around 1.5% in 2020 and 1.6% in 2021 – UOB

Economist at UOB Group Lee Sue Ann assessed the latest inflation figures in New Zealand and prospects for the next months.

Key Quotes

“Consumer prices in New Zealand were down 0.5% q/q in the second quarter of 2020, as the COVID-19 global pandemic saw cheaper petrol and falling hotel and motel prices. The latest reading was a tad better than the -0.6% q/q expected, but way below the 0.8% q/q print in the three months prior. This was the first fall in quarterly inflation since the December 2015 quarter when a drop of 0.5% was also registered.”

“Annual inflation was at 1.5% y/y compared to 2.5% y/y in the first quarter of 2020, but beating estimates for an annual rise of 1.3% y/y. Still, this is a setback for the Reserve Bank of New Zealand (RBNZ), which has spent almost a decade trying to get inflation above the middle of its 1%-3% target band. Increased prices for rent, and cigarettes and tobacco were partly offset by lower petrol prices. Meanwhile, consumer prices excluding food, fuel and energy rose 1.9% y/y, slowing from 2.3% y/y in the first quarter, whilst other measures of underlying inflation were softer.”

“The month of June was a period of high uncertainty due to COVID-19. At the same time, a rent freeze was introduced in New Zealand for existing tenancies, but not new tenancies. This made estimating rent change more difficult than usual. The RBNZ has already responded to the COVID-19 pandemic by slashing interest rates to a record low of 0.25% and launching a massive NZD60bn bond-buying campaign. Growth has clearly rebounded in the last month as the country all but eliminated the virus allowing a re-opening of the economy. But with unemployment set to rise and wages soft, the outlook is a subdued one. We expect overall headline CPI to remain comfortably in the lower end of the 1-3% target band, at 1.5% and 1.6% for 2020 and 2021, respectively.”