New Zealand's consumer price index (CPI) rose at the fastest pace in about a decade in the second quarter, sending the dollar higher and cementing the view that the central bank may tighten monetary policy as early as next month.
The inflation figures come after the Reserve Bank of New Zealand (RBNZ) announced a halt to its quantitative easing program earlier this week due to a surprise rebound in business confidence, a sharp rise in inflationary pressures and a tight labor market.
CPI rose a higher than expected 1.3% in the quarter ending June from 0.8% in the first quarter, according to data released by Statistics New Zealand on Friday, taking annual inflation to 3.3%, the highest since June 2011 and past the RBNZ's target inflation band of 1%-3%.
The increase was driven by higher prices for new housing, food and petrol, Statistics New Zealand said in a statement, but part of it was attributable to the fact that it is measured against the June 2020 quarter, a period impacted by the Covid-19 lockdown.
"This extremely strong data print absolutely confirms our view that the OCR will need to be lifted in August, given the economy is at risk of becoming dangerously overheated," ANZ economist Miles Workman said in a note.
Westpac Bank said it now expects three rate hikes before the end of the year.
A rate hike in August would make the RBNZ among the first central banks in the developed world to start normalizing monetary policy. The Reserve Bank of Australia (RBA) has said it was unlikely to raise rates until 2024.
Finance Minister Grant Robertson tried to temper some of the excitement saying while there were inflationary pressures, the pandemic was still raging around the world.
But he agreed that this was an "unexpected development" from where the country was a year ago.
"It's quite clear there have been pressures in the economy and they are the pressures of growth," Robertson told reporters.
He did not comment on whether the RBNZ should hike interest rates but said there were no plans to roll back any of the government's pandemic-driven fiscal stimulus announced last year.
Dollar rallies
Economists polled by Reuters had forecast CPI to rise 0.8% for the quarter, with an annual rise of 2.8%. The inflation figures easily outpaced the RBNZ's forecast in May of a 0.6% rise in quarterly CPI and an annual rate of 2.6%, and firmed up views that a hiking cycle may start soon.
The RBNZ also released its figures for sectoral inflation model later in the day, which rose to 2.2% in Q2, the highest level in 11 years from an upwardly revised 2% in Q1.
The New Zealand Dollar rallied 0.5% reaching $0.7019.
The two-year swap rate surged 10 basis points to 1.095% on the data, the highest since February last year when the emergence of the pandemic led to massive policy easing across the globe.
Its success in eliminating coronavirus and its geographic distance from the rest of the world has helped New Zealand's domestic economy bounce back from the impact of Covid-19 much faster than most other countries.
Analysts have noted that part of the annual reading was exaggerated as it was measured against the June 2020 quarter, a period impacted by the Covid-19 lockdown where some prices fell.
Citibank analyst Josh Williamson said RBNZ should hold fire until after the Q3 CPI print "which will allow for more clarity on what price rises are temporary."