Fuel costs, weaker currency prompt sharp jump in New Zealand inflation

  • New Zealand's inflation accelerated sharply in the third quarter, driven by higher fuel prices and a weaker currency and beating expectations
  • Prices rose 1.9 percent year-on-year in the third quarter, compared with a median forecast in a Reuters poll of 1.7 percent and up from 1.5 percent in the second quarter.
  • Inflation excluding volatile food and energy prices, edged up marginally, to 1.2 percent year-on-year from 1.1 percent.
Construction site and skyscrapers at Customs Street West, in the Central Business District in Auckland, New Zealand, October 10, 2017.
Smith Collection | Gado | Getty Images
Construction site and skyscrapers at Customs Street West, in the Central Business District in Auckland, New Zealand, October 10, 2017.

New Zealand's inflation accelerated sharply in the third quarter, driven by higher fuel prices and a weaker currency and beating expectations, although the central bank was expected to regard those factors as transitory in the near term.

Prices rose 1.9 percent year-on-year in the third quarter, compared with a median forecast in a Reuters poll of 1.7 percent and up from 1.5 percent in the second quarter, data showed on Tuesday. Inflation is now close to the Reserve Bank of New Zealand's (RBNZ) target mid-point of 2.0 percent.

But RBNZ was expected to look past the headline numbers and keep to a commitment to hold interest rates at a record low through 2019 and into 2020, as there were few compelling signs of stronger underlying price pressures. Chances for rate cuts, which were not widely expected but were left on the table by the RBNZ in recent comments, were seen diminishing, however.

"With core measures still relatively subdued, we expect the RBNZ to remain patient, even if headline CPI rises above 2.0 percent in the near term," ASB economists said in a note.

"We continue to expect the RBNZ to leave (rates) on hold until early 2020."

Inflation excluding volatile food and energy prices, edged up marginally, to 1.2 percent year-on-year from 1.1 percent.

Other core measures were also little changed: the trimmed mean held steady at 1.8 percent, while the weighted median slowed to 2.2 percent from 2.3 percent.

The RBNZ's own measure of core inflation, the sectoral factor model, will be released at 3.00 pm local time (0200 GMT).

Question marks about the strength of economic activity in New Zealand remained. Business confidence was at a nine-year low and manufacturing activity remained below its long-term average, while hiring and investment intentions have been falling.

"All told, the RBNZ will probably look through the jump in energy prices and conclude that underlying inflation isn't strong enough yet to meet its inflation target ... so there's no need to rush to raise interest rates," said Marcel Thieliant, senior Australia and New Zealand economist at Capital Economics.

"Equally, though, the RBNZ doesn't need to cut."

Quarter-on-quarter, inflation was 0.9 percent, versus a 0.7 percent forecast in the Reuters poll and 0.4 percent in the previous three-month period, the data showed.

A 19 percent on-year jump in petrol prices in September, the highest annual increase since June 2011, was the main driver behind the jump in inflation, Stats NZ said. It was the first time petrol prices had risen for four consecutive quarters since September 2008, during the global financial crisis.

The falling exchange rate made consumer tech goods more expensive, the stats office said. The kiwi last traded at $0.6576, versus $0.6545 before the data.