New Zealand Q3 inflation at 3.7%, below forecasts, RBNZ hike still expected

The inflation figure was only slightly lower than expected, leaving the policy outlook largely unchanged. Markets continue to see an almost certain rate rise on October 28 and fully anticipate 50 basis points of cumulative tightening by the end of February. The kiwi edged down just below 0.57, indicating traders reduced only the most aggressive hike expectations. Oil now becomes the main variable to watch: the conflict in the Middle East is raising costs for fuel, fertiliser and transport, and with petrol already the biggest contributor to inflation, any additional increase in crude prices will directly feed into an expected fourth-quarter rebound. That keeps the balance tilted toward a longer tightening cycle. Support for the New Zealand dollar will likely depend more on how hawkish the RBNZ's guidance proves next week than on today's release.

-

Earlier:

• New Zealand Q3 CPI 3.7% y/y (expected 3.8%, prior 4.1%)

-

New Zealand's inflation came in below expectations, but with underlying pressures firm and fuel prices rising again, the undershoot looks more like a temporary slowdown in the problem than a change of direction.

Summary:

• Annual CPI decelerated to 3.7% in the third quarter from 4.1%, undershooting the 3.8% Reuters poll forecast and the RBNZ's 3.9% prediction
• Quarterly CPI advanced 0.7%, versus a forecast 0.8%
• Petrol remained the largest contributor to price increases despite easing from the June quarter; house-building costs also went up
• Non-tradeable inflation decreased to 3.3% from 3.4%, while tradeable inflation stood at 4.3%
• Markets assign a 98% probability to a rate hike next week and fully factor in 50 basis points of tightening by the end of February; the NZD fell to about 0.569
• Economists project inflation will rebound in the fourth quarter, with ASB expecting 4.5% by year-end

New Zealand's annual inflation rate declined to 3.7% in the third quarter, below economists' predictions but still exceeding the upper limit of the Reserve Bank of New Zealand's target range, official figures showed on Thursday. The outcome did little to alter expectations that the central bank will increase interest rates next week.

The consumer price index climbed 0.7% from the second quarter, according to Statistics New Zealand, compared with a 0.8% increase that economists in a Reuters poll had expected. The annual figure fell from 4.1% in the June quarter and came in under both the 3.8% consensus estimate and the RBNZ's 3.9% projection. The central bank aims for annual inflation between 1% and 3% over the medium term.

Statistics New Zealand reported that petrol prices were the biggest contributor to inflation, even though they had moderated from the June quarter, and that house-building costs also increased. Non-tradeable inflation, covering domestically driven price pressures, slowed to 3.3% from 3.4%. Tradeable inflation, which includes imported goods such as fuel, amounted to 4.3%.

The New Zealand dollar eased to around 0.569 against the US dollar following the data release. Nevertheless, markets still see a 98% likelihood of a rate rise at next week's monetary policy review and fully price in 50 basis points of tightening by the end of February. The RBNZ has lifted the official cash rate twice this year, taking it to 2.75%.

Westpac New Zealand senior economist Satish Ranchhod said that while the outcome was below the RBNZ's forecast, solid core inflation would give policymakers reason to pause. He added that a rate hike next week now appears to be the path of least resistance, with both market pricing and economist expectations converging on such a move.

Economists anticipate that inflation will pick up again in the fourth quarter as fuel prices rise once more. ASB forecasts inflation of 4.5% by the end of the year and said its 2027 outlook appears considerably stronger than the RBNZ's September projections. The Middle East war is adding to global stagflation risks by disrupting energy supplies and shipping, which is raising costs for fuel, fertiliser and transport.

This data release is the final significant one before the RBNZ's decision. It arrives as inflation becomes a key issue ahead of the closely contested general election on November 7.