NZ dollar, wholesale interest rates, drop after CPI inflation data

The NZ dollar and wholesale interest rates fell after softer-than-expected September quarter inflation data. Photo / File

The New Zealand dollar and wholesale interest rates dropped after lower-than-expected inflation data served to pare back bets the Reserve Bank would increase its official cash rate (OCR).

The central bank’s OCR currently sits at 5.5 per cent but expectations were starting to build that it would hike it by 25 basis points at its next opportunity on November 29.

By late afternoon the currency, which is influenced by interest rates, was at US59.0c - down about one-third of a US cent from its pre-release level.

The New Zealand/Australian dollar fell to A93.12c from A93.50c beforehand.

The two-year swap rate, which has a bearing on home mortgage rates, dropped to 5.625 per cent from 5.715 per cent just before the release.

Two-year government bond yields were at 5.602 per cent, down from 5.64 per cent.

Stats NZ said September quarter inflation was up 1.8 per cent, for an annual rate of 5.6 per cent, against market expectations of 1.9 per cent and 5.9 per cent, respectively.

“The market was thinking that a stronger number than consensus would fuel rate hike bets, and we did not have that,” said Imre Speizer, head of New Zealand markets strategy at Westpac.

“It probably does not shift the Reserve Bank any more in a downward direction, but it at least gives them more comfort that things are tracking as expected,” he said.

“Therefore, rate hike bets have been pared back.”

The latest CPI data might give Governor Adrian Orr and the Reserve Bank some comfort that things are tracking as expected. Photo / Mark Mitchell, NZME graphic

ANZ interest rate strategist David Croy said the data had given the market a reason to debate the odds of a November rate hike.

“The market is still pricing in some risk of a hike, but the fact that the number was lower than expected has seen the market pare those odds back,” Croy said.

Capital Economics said the weaker-than-expected CPI print reinforced its view the Reserve Bank would not increase rates further.

Kiwibank chief economist Jarrod Kerr said the numbers “significantly reduce” the likelihood of any further rate hikes.

“The interest rates market had the probability of a Reserve Bank rate hike in November at 50 per cent, leading into today’s CPI report.

“We should see a reduction in rate hike expectations,” he said.

Kiwibank expected the current 5.5 per cent to be the peak for the OCR.

“And we go one step further in suggesting rate cuts may become likely by May next year,” he said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.