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Forex News – New Zealand inflation raises chances of rate hike; kiwi benefits
January 21, 2014 2:00 pmVideo
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(click to enlarge)
The release of inflation figures for the fourth quarter in New Zealand surprised economists as they were expecting a drop in inflation by 0.1% quarter-on-quarter. Instead, inflation rose by 0.1% and the year-on-year increase came in at 1.6%.
Although the rate of annual inflation does not represent a serious issue at this point, the Reserve Bank of New Zealand likes to focus more on price pressures in the non-tradable goods and services category as they are a better indication if the local economy is near capacity.
As can be seen from the chart, inflation for non-tradables was running at a much higher 2.9% compared to the headline inflation level of 1.6%. The price of tradables has actually fallen during the past 6 months as the New Zealand dollar has appreciated.
The next rate-setting meeting of the Reserve Bank of New Zealand is on the 29th of January and although most economists expect the Central Bank Interest Rate to remain unchanged at 2.50%, according to the futures markets and traders, there’s more than a 60% chance of a quarter-point hike to 2.75%.
An interest rate rise of that magnitude would make the New Zealand dollar the highest yielding currency out of developed countries, with the Australian dollar closely following in second place at 2.50%.
New Zealand’s economy is expected to post decent growth of 2.5% in 2013 and to accelerate to 3% during 2014. The economy is helped by strong dairy demand, especially out of China, as well as a buoyant housing and construction sector. House prices have been rising in the country, up 9.2% in December from a year earlier.
The release of New Zealand’s inflation report caused the kiwi to spike by more than half a cent against the US dollar, from 0.8260 to about 0.8320. Analysts are generally upbeat about the Kiwi’s prospects in 2014.
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