New Zealand consumer prices were unchanged in the second quarter, pushing the dollar and swap rates lower as the market pared back expectations the central bank might soon join others - like the Bank of Canada - that have lifted or are expected to lift rates soon.
The kiwi dollar dropped to 72.61 US cents after the figures were released from 73.26 cents immediately before Statistics New Zealand said the consumers price index was unchanged in the three months to June 30 while annual inflation was 1.7 per cent. Two-year swap rates dropped around 5 basis points to 2.20 per cent and the OIS market is now pricing in a rate hike in August 2018, two months later than it was prior to the data.
Economists had expected inflation of 0.2 per cent in the second quarter, for an annual rate of 1.9 per cent, according to the median in a poll of 15 economists surveyed by Bloomberg. The data also undershot the central bank's forecasts for inflation of 0.3 per cent in the second quarter for an annual rise of 2.1 per cent. Second quarter inflation eased back from the first quarter when it was 1 percent and the annual rate was 2.2 per cent.
"Together with recent soft GDP figures, today's data and the mixed forward-looking inflation signals will leave the RBNZ fully vindicated in its ultra-cautious stance and no doubt the market will shift more towards its view," said ANZ senior economist Phil Borkin.
The Reserve Bank is mandated with keeping annual inflation between 1 and 3 percent, with a focus on the mid-point. At the June rate review, Reserve Bank governor Graeme Wheeler kept the official cash rate at 1.75 per cent and said the bank viewed a recent pickup in inflation as a temporary spike in the tradables sector.
Today's data, where weaker fuel prices offset rises in household basics like rent, food and electricity, has added to that view.
"Overall, these figures should prompt the markets to conclude that interest rates are unlikely to be raised next year. The RBNZ is unlikely to follow in the footsteps of the Fed and the Bank of Canada until it looks as though underlying inflation will be sustained above 2.0%. That probably won't happen until 2019," said Capital Economics chief Australia and New Zealand economist Paul Dales.
The central bank's forecasts show it does not expect rates to lift until September 2019 at the earliest while several economists have been signalling mid-2018 as the most likely starting point but "today's result should put a severe dent in market expectations that the RBNZ will be hiking rates by mid-2018, said Westpac Bank acting chief economist Michael Gordon.
Petrol prices fell 1.9 per cent in the quarter and were up 4.5 per cent on the year. The average price of 1 litre of 91 octane petrol was $1.86 in the June quarter, down from $1.90 in the March quarter but up from $1.78 in the June quarter a year earlier.
Overall the transport sector - which includes fuel and other services such as airfares - fell 1.3 per cent on quarter and showed an annual rise of 1.2 per cent. Domestic airfares were down 14.5 per cent in the quarter while international air transport rose 3.7 per cent.
The slide was offset by a 0.7 per cent rise in food prices on the quarter, with vegetable prices jumping 19 per cent, reflecting poor weather and growing conditions. Dairy prices were also up, with prices for butter reaching their highest price since the series began, Stats NZ said.
Housing-related prices continued to increase, up 0.8 per cent on the quarter and 3.1 per cent on the year. Prices for new housing rose 1.8 per cent in the June quarter for an annual increase of 6.4 per cent. Rental prices rose 0.4 per cent in the quarter and 2.1 per cent on the year.
Local body rates eased 0.1 per cent in the quarter and were up 3.2 per cent on the year while refuse disposal and recycling fell 1.3 per cent in the quarter but rose 4.5 per cent on the year. Household energy, which includes electricity, gas and solid fuels rose 1.5 pe rcent in the quarter and 1.8 per cent on the year.
The tradables consumers' price index, which includes goods and services that compete with international rivals, fell 0.2 per cent in the quarter but rose 0.9 pe rcent on the year. Non-tradables inflation, which focuses on domestic inflation, rose 0.2 per cent in the quarter and was up 2.4 per cent on the year. Prices for the purchase of newly built houses, excluding land, made the most significant upwards contribution to the annual result.