New Zealand consumer inflation slows, still exceeds central bank target

New Zealand's consumer inflation hit a two-year low in the third quarter, reducing expectations the central bank will hike the cash rate further in November and prompting a fall in the New Zealand dollar. Consumer prices rose 5.6 per cent year-on-year in the third quarter, slower than the 6.0 per cent increase in the second quarter, Statistics New Zealand said in a statement on Tuesday. The data was slightly lower than economists' expectations of a 5.9 per cent annual rise in a Reuters poll.

While inflation remains well above the Reserve Bank of New Zealand's target of 1 per cent to 3 per cent, the easing in inflationary pressures has reduced the chance that the central bank will hike the cash rate at its November meeting, according to the market and analysts. Two-year swap rates fell 7 basis points to 5.63 per cent as the market pared the chance of a hike in November to 20 per cent, from 33 per cent ahead of the data. The New Zealand dollar slipped 0.4 per cent to $0.5905 following the data.

"The chance of a further rate hike from the RBNZ in November is less likely," said Westpac senior economist Satish Ranchod in a note. "The extent to which core inflation pressures continue to ease rapidly in the December quarter and beyond will be critical in determining the likelihood and timing of rate increases next year.”

Inflation is a significant challenge for the RBNZ and it has responded by raising interest rates to 5.5 per cent from a record low of 0.25 per cent in October 2021.

The central bank has said rate increases are having the desired impact on dampening inflation, although the cash rate will have to remain at this restrictive level for some time to ensure inflation returns to the target range.

ASB Bank Senior Economist Mark Smith said in a note that many of the near-term inflationary risks identified by the RBNZ look to be crystallising, with higher prices for fuel, public transport, local authority rates, alcohol and insurance impacting the third-quarter figures, though there were also some encouraging signs. "Growing spare capacity in the labour market, the fickle global scene, and tightening financial conditions suggest that the hurdle to an (official cash rate) hike in the coming meetings remains high," he said.