Report notes a quantum shift in expectations and business confidence
Inflation rose by 1.3% in the June 2021 quarter, with its core measures printed between 3% and 3.3% over the year – making inflation “officially” above the Reserve Bank of New Zealand’s (RBNZ) mandated 1% to 3% year-on-year (yoy) target band, according to Kiwibank.
Kiwibank’s report showed that the latest inflation figure was much higher than the consensus of 0.7% and Kiwibank economists’ 1.0% pick. Over the year, prices rose 3.3%, with gains in construction costs, transport costs, and food, among others.
“It’s confirmed! Inflation is accelerating and is now through the top of the RBNZ inflation target band. Inflation is set to hold above the top of the target band next quarter,” Kiwibank economists said.
“We have seen a quantum shift in expectations and business confidence. And we’re in a different pricing environment. Businesses are less worried about demand and more worried about supply.”
Read more: RBNZ releases Monetary Policy Review and OCR decision
Kiwibank economists stated that the 1.3% CPI inflation in the June quarter exceeded their expectations, and the 3.3% annual inflation was the highest rate in over a decade.
“But a jump in annual inflation from 1.5% at the start of 2021 was expected. In part because of the base effects from last year’s lockdown induced fall in prices. The last time the annual inflation rate tested such heights was in June 2011, rising to 5.3% due to GST hikes,” they said.
“Some of the key drivers of inflation are expected to be transitory. Global supply-chain disruption should be addressed as the world gets back to a new normal – taking the pressure off shipping costs.
“Labour shortages will hopefully abate next year as our, by then, vaccinated country starts the process of opening back up to the world. But for the RBNZ, these transitory factors could easily turn into permanent inflation in the current atypical environment. So, something has to give, and the RBNZ is now willing to oblige.”
Kiwibank economists now expect the RBNZ to lift the OCR in August 2021, the first of at least three hikes from here.
“We’re likely to see two hikes by year-end and a push to 1% by February. Beyond 1% will depend on the interest rate sensitivity of the economy coming off record-low rates,” they said. “We have pencilled in another lift in the cash rate to 1.5%, but that’s likely to be all we see in the near-to-medium term. An earlier lift off from the RBNZ will (hopefully) mean less work will need to be done to restrain the economy in the future.”
