Chances fade of a rate cut next week

Graeme Wheeler (Getty)
Graeme Wheeler (Getty)

By Tony Field

It is looking a little less likely that the Reserve Bank (RBNZ) will cut interest rates next week, following the release of the latest consumer price numbers.

The Consumer Price Index (CPI) rose just 0.2 percent in the first three months of the year. That is what the RBNZ expected, but was slightly higher than the markets were predicting.

The weaker global oil prices played a part. Airfares fell 12 percent and petrol prices slipped by 7.5 percent in the March quarter.

But tobacco and cigarette prices increased 9.4 percent, thanks to 10 percent rise in excise duty.

Fruit prices rose by 8.2 percent. However that was only a 1.6 percent increase if you allow for seasonal factors.

The end result was a lift in the CPI of 0.2 percent.

The RBNZ aims to keep annual inflation at between one and three percent. Ideally they would like it to be around two percent.

But inflation has been running well below one percent.

So the Reserve Bank has indicated it expects it will cut the Official Cash Rate at least once more this year from the current level of 2.25 percent.

Economists at Infometrics say that prior to the CPI figures coming out the markets were pricing in a 60 percent chance of a rate cut. It says the market probability has now fallen to around 50 percent.

They make the point that many of the biggest movements in prices were "either seasonal changes or factors outside the Reserve Bank's control". A good example is the increase in the tobacco excise tax.

Infometrics thinks the RBNZ might want to collect more labour market and dairy price data before making another cut to the OCR.

Some economists say the odds of a rate cut next week are even lower, at around 30 percent.

The fact the CPI was stronger than the markets were expecting was reflected in the New Zealand dollar.

The Kiwi moved up more than half a percent yesterday, moving from around 68.7 US cents before the data release to around 69.20 by yesterday evening.

This morning it is trading at 69.45 US cents.

It is slightly lower against the Australian currency, trading at 89.66 Australian cents.

The Kiwi was this morning sitting at 48.65 pence and 61.39 Euro cents.