New Zealand consumer prices rose more than expected in the second quarter, boosting bets the central bank will lift interest rates next week and sending the currency to its highest level since it was floated 22 years ago.
The central bank has lifted interest rates by a total of 75 basis points this year to 8%, the highest among industrial nations, due to concern over domestically generated inflation stemming from strong consumer spending, particularly in the housing market.
The consumer price index (CPI) rose 1% in April-June, data showed on Monday, driven by rises in petrol and housing costs. This topped an 0.8% gain forecast by economists and was double the increase seen in the March quarter.
Annual inflation eased to 2% from 2.5%, staying within the 1% to 3% target range of the Reserve Bank of New Zealand (RBNZ), but the decline was due to lower oil prices compared with a year ago and would provide little comfort for the inflation-wary central bank.
"The fact that it was so much stronger than the bank's own expectations for the second quarter in a row must have them very concerned," said Stephen Toplis, head of research at Bank of New Zealand.
The central bank had forecast last month that the CPI would rise 0.7% in the latest quarter and 1.7% from the same period a year earlier.
The currency, known as the kiwi , jumped more than a third of a U.S. cent to $0.7898, its highest since being floated, before pulling back to settle around $0.7870/80.
Bank bills were sold off with the yield on the September contract rising 7 basis points to 8.51%.
Currency traders said the yen seemed to be getting sold against the kiwi as investors took the data as a cue to exploit a 7.5 percentage point difference in interest rates between New Zealand and Japan. The Bank of Japan held its official rate at just 0.5% last week.
Pressure
Many analysts had felt the inflation data would be the decisive factor for the central bank's decision on interest rates on July 26 after figures last Friday showed that retail sales surged 1.2% in May, seasonally adjusted.
An updated Reuters poll conducted after the release of the CPI showed 10 of 17 forecasters now expected the central bank to raise interest rates next week to 8.25%. Just three had
picked a rate rise before the data came out.
Economists had expected consumer prices to have risen 1.8% from a year earlier, when a sharp rise in petrol prices lifted the annual inflation rate to a five-and-a-half-year high of 4%.
The annual rate has been within the RBNZ's target band for the past three quarters but domestic inflation has remained high, with the non-tradables component of the CPI rising 1.1% in the second quarter after rising 1.2% in the March quarter.
This measure covers prices of goods and services that do not face foreign competition, such as rent, housing costs, tuition and medical fees.
Analysts said the data added pressure on the central bank to lift rates again, but it was likely to be a close call.
"This still ups the ante for the RBNZ to go again, although I think the currency is going to be a major sticking point when it's up around $0.79," said ANZ-National Bank chief economist Cameron Bagrie.
The central bank, concerned that the currency's strength is hurting the export sector, has been intervening in the foreign exchange market to curb the strength of the New Zealand dollar.
Rating agency Standard & Poor's affirmed a triple-A rating -- its highest -- on New Zealand's sovereign debt on Monday, saying the government's tight fiscal policy was offsetting concerns over the country's large current account deficit and inflation.