A weak New Zealand Q2 consumer price print fuels RBNZ rate cut speculation

Data released by Statistics New Zealand on Monday showed New Zealand’s CPI rose at a slightly lower than expected pace of 0.4 percent during the second quarter of 2016. The surprisingly weak development of consumer prices in the second quarter has fuelled rate cut speculation by the RBNZ at its next meeting on August 11, putting pressure on the New Zealand dollar.

“Today's softer than expected result reinforces the case for a 25 basis point reduction in the OCR [Official Cash Rate] in August,” said Westpac acting chief economist Michael Gordon.

The RBNZ forecast in June that inflation would accelerate to 1.3 percent in Q4 of 2016 and reach 2 percent by end-2017. The central bank on June 9 said further policy easing may be required to ensure that future average inflation settles near the middle of the target range. Odds of a cut surged late last week after the RBNZ unexpectedly announced it would release the economic assessment, which economists tipped could signal a lower inflation track.

New Zealand inflation remained below expectations, the currency also remains much stronger than the RBNZ had expected. According to RBNZ projections, NZD would have to depreciate by roughly six percent on a trade weighted basis by year-end, however, without a further rate cut that seems unlikely.

"As early as March the RBNZ had reacted to an excessively strong NZD and had lowered key rates in a surprise move. We have no reason to assume that the RBNZ will not take decisive action again in its next meeting. Otherwise it would risk NZD appreciating even further," notes Commerzbank in a report.