New Zealand's annual inflation rate has accelerated to 3%, reaching the upper limit of the central bank's target range. Despite this, financial markets remain convinced the Reserve Bank of New Zealand (RBNZ) will cut interest rates in November, keeping the New Zealand dollar under a bearish outlook.
The latest Consumer Price Index (CPI) data revealed a 1.0% increase for the recent quarter, bringing the yearly figure to its highest level in over twelve months. However, underlying inflation metrics showed signs of cooling, providing the RBNZ with justification to continue its monetary easing policy to support a weaker economy.
Key Takeaways
- New Zealand's annual inflation reached 3.0%, the top of the RBNZ's 1-3% target band.
- Housing and utility costs, particularly an 11.3% rise in electricity prices, were major drivers of inflation.
- Despite high inflation, markets have fully priced in a 0.25% RBNZ rate cut for November.
- The NZD/USD currency pair remains in a downtrend, with analysts favoring selling on price increases.
Inflation Reaches Central Bank's Upper Limit
According to data from StatsNZ, consumer prices in New Zealand rose by 1.0% in the last quarter, pushing the annual inflation rate to 3.0%. This figure aligns with market expectations and the RBNZ's own forecasts from two months prior. The annual rate has now climbed back to the ceiling of the central bank's mandated 1-3% target range after hitting a low of 2.2% in the third quarter of 2024.
A closer look at the report shows that the increase was largely driven by specific domestic costs, while other areas showed signs of moderation. This mixed picture gives the RBNZ flexibility in its upcoming policy decisions.
Housing and Utilities Drive Price Gains
The primary contributors to the annual inflation figure were housing and household utilities. Electricity prices experienced a significant surge of 11.3%, the largest increase recorded since the late 1980s. Additionally, local authority rates rose by 8.8%, continuing their role as a key inflationary pressure, although this was a slight moderation from the previous year's peak.
In contrast, rental price growth slowed considerably. Rents increased by just 2.6% over the year, marking the smallest annual rise in more than four years. These three components—electricity, rates, and rent—collectively represent about 17% of the CPI basket but were responsible for nearly one-third of the total annual price increase.
Inflation Breakdown
- Annual CPI: 3.0%
- Electricity Price Rise: 11.3% (Largest since late 1980s)
- Local Authority Rates Rise: 8.8%
- Rent Increase: 2.6% (Smallest in over four years)
Underlying Inflation Trends Offer RBNZ Leeway
While the headline number is high, underlying measures of inflation, which the RBNZ monitors closely, tell a different story. Non-tradeable inflation, which reflects domestic economic pressures and policy impacts, increased by 1.1% for the quarter. This brought the annual rate down to 3.5%, a new multi-year low and in line with the RBNZ's projections.
Conversely, tradeable inflation, which is influenced by international prices and exchange rates, rose by 0.8% for the quarter. The annual rate for tradeable goods reached 2.2%, its highest level since the fourth quarter of 2023. This suggests that while domestic price pressures are easing, imported inflation is picking up.
"Stripping out volatile price movements, CPI excluding food, household energy, and vehicle fuels gained 0.8% for the quarter, seeing the increase from a year earlier moderate further to 2.5%."
This moderation in core inflation is a key reason why the market believes the RBNZ will proceed with further rate cuts, as it indicates that the underlying trend is one of disinflation despite the headline spike.
Market Expects November Rate Cut
Following the release of the inflation data, financial markets have shown little change in their expectations for the RBNZ's next move. A 25 basis point (0.25%) interest rate cut in November remains fully priced in, with some market participants even seeing a small possibility of a larger 50 basis point cut.
This aggressive easing cycle has seen the official cash rate fall significantly from its peak of 5.5% last year. Current market pricing suggests the rate will bottom out at either 2.00% or 2.25% before the cycle concludes. This divergence in monetary policy, with New Zealand cutting rates while other central banks hold steady, has been a significant factor behind the New Zealand dollar's recent weakness against currencies like the U.S. and Australian dollars.
Monetary Policy Divergence
When a country's central bank lowers interest rates, it can make holding that country's currency less attractive to foreign investors seeking higher returns. This often leads to a depreciation of the currency's value, which is a key factor currently affecting the NZD.
NZD/USD Technical Analysis
The NZD/USD currency pair continues to exhibit a clear downtrend on technical charts, trading well below the high of over 0.6000 set last month. Momentum indicators like the Relative Strength Index (RSI) and the MACD are firmly in bearish territory, although they are showing early signs of potentially bottoming out.
The prevailing strategy among traders is to sell on any price rallies unless the pair can decisively break above the downtrend line established in September. While a bullish pin bar candle on October 14 hinted at a possible reversal, subsequent price action has been marked by indecision, leaving the short-term direction uncertain.
Key Levels to Watch for NZD/USD
- Resistance: If the downtrend is broken, traders will watch the 0.5754 and 0.5800 levels as the first significant hurdles.
- Support: The 0.5678 level, which provided support multiple times earlier this year, remains a critical floor for the currency pair. A strong price reversal from just above this level earlier in the month highlights its importance.
A technical event known as a "death cross," where the 50-day moving average crosses below the 200-day moving average, has occurred. However, analysts are largely disregarding this signal due to its historically unreliable predictive power for this specific currency pair.
AUD/NZD Remains in a Sideways Range
Turning to the Australian dollar versus the New Zealand dollar (AUD/NZD), the pair is currently trading within a defined range. Immediate support is located at 1.1280, while a band of resistance exists between 1.1400 and 1.1447.
A recent bullish candle suggests a possible retest of the top of this range. However, momentum indicators are showing diminishing bullish strength after a strong run-up in recent months. This suggests that selling rallies near the resistance level could be a more favorable strategy.
Should the 1.1280 support level be broken, traders will be watching for potential moves down toward the 50-day moving average and further support levels at 1.1180, 1.1150, and 1.1120.
