NZ CPI below expectations – again

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The Q2 CPI number for NZ printed at 0.3%q/q, taking the annual inflation pace down to 1% (the RBNZ has a 1% to 3% control range, with a 2% target).

The trimmed mean and weighted median CPI numbers were both +0.3%q/q, marking a deceleration from the Q1 pace.

I got a bit burned tipping a rate cut in June (RBNZ was unchanged at 2.5%), however I still think that their next move is a cut.


Unemployment remains stuck at 6.5%, and inflation is too low.

The RBNZ’s recent forecasts seemed wrong to me. They need to correct that in September.

In particular, I could not understand the RBNZ’s lowering of the TWI assumption in their Q2 forecast. Every time there is a hint of global recession and the NZD TWI falls, the RBNZ takes the boost from the lower FX and does not sufficiently downgrade their trading partner growth assumption.

The end result is that the NZD TWI bounces when they lose their easing bias – and they end up trying to jaw-bone the market. This happened between the Q1 and Q2 MPS – the TWI went above their assumption, and they then introduced two way risk into the policy outlook at their April meeting.

This (and a bit of risk off) weighed on the NZD, and they assumed it was going to keep going in the June MPS – and dropped their easing bias.

So, i think they have their FX model/ assumptions wrong. The only way they’ll get their TWI track is if there is serious global risk off – in which case they’d need to cut due to the weak export outlook.

Additionally, another lower than expected inflation print asks some difficult questions of their decision to revise down the estimate of spare capacity.

Inflation is continually surprising on the downside. It was below RBNZ forecast in Q1, and now it’s below RBNZ forecast in Q2 (0.3%q/q v. RBNZ +0.5%q/q). This suggests to me that their output gap estimate is too small.

In conclusion, the lower than expected NZ Q2 CPI number strongly confirms my instinct that the RBNZ’s next move is down – and my hunch that they made the wrong (tactical) move in June.

They need to revise down their CPI forecasts, and widen their output gap estimate. The drop in petrol prices alone ought to mean that there is little headline price pressure in Q3 (RBNZ Q2 MPS forecast was +0.5%q/q).

A zero in Q3 would take headline CPI to 0.6%q/q – given that the estimate is biased up by ~1%, that’s deflation. That ought to be sufficient to justify 50bps of easing … i’m thinking 25bps cuts at each of the Sep and Oct meetings, with the potential for more if global growth tanks.


  1. it is interesting that the NZ CPI seems to show where ours will go.

    RBNZ have always been a tad slow.

    1. Yeah, we could well see sub 0.5% again in q2 if the relationship holds true. There just doesn’t seem to be much inflation out there just now. Commodities have headline inflation falling, and slack labour markets are keeping core down.

    1. Yeah, i did – because i thought that the RBNZ would have forecast a long period of sub 2% CPI given the growth downgrades. Against expectations they wound up RAISING their CPI forecast, as they dropped their TWI track and narrowed their estimate of spare capacity.

  2. you’ve been very good on the RBA since November mate. let’s see if you can pop off another gun core forecast for Q2…

    1. I am thinking 0.5%qq core and a hold, but that is subject to revision. I will blog when i have something firmer.

      1. Does the bump in Q2 import prices make you see upside risks to that CPI forecast?

        1. Not really. My sense is that firms lack(ed) pricing power – which is why they are squealing.

          Sent from my iPad

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