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NEW ZEALAND: VIEW: Westpac Believes RBNZ Will Focus On Core Due To Volatility

NEW ZEALAND
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Westpac expects Q4 NZ CPI to rise slightly higher than the RBNZ at 0.5% q/q compared with 0.4% but the annual rate is in line at 2.1% y/y. The surge in December airfares drove Westpac to revise up the quarterly expectation. It believes that core measures will continue moving towards the mid-point of the RBNZ’s 1-3% band and that the data won’t be a “big surprise for the RBNZ”. 

  • Westpac notes that volatility in certain headline components is likely to mean that the RBNZ is “more focused on the underlying trend in inflation, which is now looking much better contained than it has in a long time”.
  • “We estimate that inflation excluding food, fuel and energy costs will ease to 3.0% from 3.1% previously, while trimmed mean inflation is likely to fall to around 2.3%.”
  • “The largest upside contributors to inflation are expected to be domestic and international airfares (up 9% and 7% respectively over the past three months), as well as holiday accommodation costs (up around 3%). Combined, those groups account for around 6% of the CPI and they typically record larger increases over the holiday months.”
  • Non-tradeables inflation is likely to remain elevated but “that firmness masks some important detail under the surface. Price and cost pressures have been cooling in some sectors of the domestic economy that are sensitive to the high level of interest rates in recent years”.
  • “One area that we’re keeping a close eye on is the New Zealand dollar, which has fallen to its lowest level since 2022. Over time, that decline could push up the cost of some imported goods, such as petrol. This will be an important area to watch over the coming year and will likely be a consideration for the RBNZ’s policy stance.”
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Westpac expects Q4 NZ CPI to rise slightly higher than the RBNZ at 0.5% q/q compared with 0.4% but the annual rate is in line at 2.1% y/y. The surge in December airfares drove Westpac to revise up the quarterly expectation. It believes that core measures will continue moving towards the mid-point of the RBNZ’s 1-3% band and that the data won’t be a “big surprise for the RBNZ”. 

  • Westpac notes that volatility in certain headline components is likely to mean that the RBNZ is “more focused on the underlying trend in inflation, which is now looking much better contained than it has in a long time”.
  • “We estimate that inflation excluding food, fuel and energy costs will ease to 3.0% from 3.1% previously, while trimmed mean inflation is likely to fall to around 2.3%.”
  • “The largest upside contributors to inflation are expected to be domestic and international airfares (up 9% and 7% respectively over the past three months), as well as holiday accommodation costs (up around 3%). Combined, those groups account for around 6% of the CPI and they typically record larger increases over the holiday months.”
  • Non-tradeables inflation is likely to remain elevated but “that firmness masks some important detail under the surface. Price and cost pressures have been cooling in some sectors of the domestic economy that are sensitive to the high level of interest rates in recent years”.
  • “One area that we’re keeping a close eye on is the New Zealand dollar, which has fallen to its lowest level since 2022. Over time, that decline could push up the cost of some imported goods, such as petrol. This will be an important area to watch over the coming year and will likely be a consideration for the RBNZ’s policy stance.”