New Zealand inflation to be close to 2% by H1 2016

NZ annual inflation is currently just 0.3%, and it has been consistently below the 2% midpoint of the target range for almost four years. The RBNZ expects inflation to be close to the 2% midpoint by the first half of 2016, which is a mild downgrade from the "early 2016" in last week's OCR statement.

The recent fall in the NZ dollar is pushing up the prices of tradable goods. The RBNZ judges that this is an appropriate pace of adjustment back to its medium-term inflation target.

However, a fall in the exchange rate will only generate a transitory burst of inflation, with a lag of up to a year. Meanwhile, non-tradables inflation is already weak, and the softer growth outlook and the peak in the construction boom suggest any material pickup is some way off. 

"So maintaining inflation close to 2% is likely to require sustained tradable goods inflation, which in turn requires a sustained decline in the NZ dollar - or a significant pickup in domestic activity. But neither of those will happen if the RBNZ cuts the OCR by only another quarter percent or so", says Westpac.