New Zealand on brink of deflation as petrol prices plunge, while Kiwi remains strong

Source: Dukascopy Bank SA
The data "could prove to be a game-changer for the RBNZ as it leaves New Zealand on the cusp of outright deflation"
 - Paul Dales, economist at Capital Economics


New Zealand inflation slowed more than expected in the final quarter of 2015, as declining gasoline prices pushed annual price growth to the lowest level since September 1999. According to Statistics New Zealand, the nation's consumer price index dropped 0.5% in the December quarter, compared with economists' expectations for a 0.2% decline. Petrol prices became the main drag, plunging 7.0% over the reported period, while vegetable prices plummeted 17%. The weak quarterly number pushed an annual CPI growth to mere 0.1%. Even though the disappointing inflation data may not be enough to persuade the Reserve Bank of New Zealand to cut rates as soon as next Thursday, it certainly reinforced the view that the rates would be lowered from 2.5% to 2% this year.

The central bank blamed weak inflation on the strong New Zealand Dollar and massive plunge in oil prices, but said it predicted inflation to move within its 1%-3% target range by early 2016. Thus, the RBNZ relies on further depreciation of the Kiwi, which would be helpful to support sustainable growth. Since the central bank last met, the nation's currency has lost 5% versus the US Dollar. However, recent declines in the oil price could push petrol prices further down, pushing the New Zealand economy into deflation.


© Dukascopy Bank SA

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