Suddenly, the prospects of an interest rate cut have risen in New Zealand with a shock slide in inflation in the three months to the end of December. Consumer prices fell by a very large 0.5% in December, leaving an annual rate of just 0.1%, which is well short of the Reserve Bank’s target of 2%.
The RBNZ meets next week and will announce its first monetary policy decision on Thursday January 28. After reversing 2014’s rate rises last year to leave the official cash rate at 2.5%, the central bank had been seen as being on hold as it assessed how the economy was travelling in the early stages of 2016.
But the massive slide in oil prices so early in the new year will raise the chances of another fall in consumer inflation in the current March quarter, which would push the economy into the unwelcome experience of deflation.
It would be the first dip into deflation since 1999. At the moment it’s a burst of severe disinflation rather that outright deflation.
But the uncertain global markets, weak growth in China (the main customer for its exports, like Australia) and the continuing slide in oil prices especially, has advanced the chances of a rate cut first up next week.
The 0.5% slide in prices saw the Kiwi dollar slide sharply to under 64 US cents from 64.70 before the announcement. Statistics NZ said that after “seasonal adjustment, the CPI fell 0.2 percent".
The data “could prove to be a game-changer for the RBNZ as it leaves New Zealand on the cusp of outright deflation" Capital Economics economist Paul Dales said.
"It may not quite be enough to prompt the RBNZ to cut rates at next Thursday’s policy meeting, but it certainly supports our non-consensus view that rates will be cut from 2.5 per cent to 2 per cent this year."
New Zealand dancing with deflation
A 1.8% slump in tradeable prices drove the fall in the CPI, particularly of vegetables and fuel, where a stronger Kiwi dollar played a part in depressing prices (and world prices plunged 24% in December alone). Domestic prices rose by 0.5%, or by 1.8% year-on-year, thanks to higher housing and airfare costs.
"With dairy prices still sliding, and 2 per cent inflation more elusive than ever, we expect a genuine easing bias," from the RBNZ next week, TD Securities economist Annette Beacher said. "Anything less will reverse today’s NZD sell-off, and more."
RBNZ governor Graeme Wheeler surprised some with last month’s rate cut and remains on a weak easing bias, but the slide in the CPI will come as a big shock as the central bank had been confident (as the RBA is here) that inflation will return to the target level over time.
If there is to be any help in getting a rate cut, then the cooling in the Auckland house price boom could be it. NZ property research company Quotable Value said a week ago that annual house-price gains eased to 14.2%in December from the 10 year high of 15% in November .
The RBNZ has been watching closely the path of surging Auckland house prices which the bank believes poses a financial stability risk.
New rules started on November 1, requiring investors in the city to have a deposit of at least 30% of a property’s value to qualify for a mortgage. The government has also said it will apply a capital gains tax to investment properties sold within two years of purchase.The rules defining what is a housing investor in NZ were also tightened.
And the policing of foreign investment in housing was made tougher. Rules on investing in housing outside of Auckland were eased to try and divert attention to those areas.
Now, according to Quotable Value’s figures, there’s a hint that these measures are having an impact. While Auckland prices rose by 4.1% over the past three months, they were only up 0.2% in the month of December.
And yesterday, the Real Estate Institute of NZ (REINZ) confirmed the slow-down in Auckland and added that other parts of the country were now seeing sharper growth in property prices.
The REINZ said new record median prices were set in Waikato/Bay of Plenty, Hawke’s Bay, Wellington, Nelson/Marlborough and Otago as the market strengthened in December. In Auckland, house prices edged up less than a per cent on the previous month to $NZ770,00 as investors digested new tax rules and regulation, although they were up 13.6% for the year.
Excluding Auckland, house prices hit a record $NZ379,000, up 8% on a year ago. Including Auckland, the national median house price climbed to $NZ465,000, up 1.2% on the previous month and 3.3% on the previous year.
