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The kiwi dipped after inflation expectations eased, prompting some to question the need for future interest rate hikes.
The Reserve Bank’s second quarter survey showed that inflation expectations at the closely watched two-year ahead horizon fell to 2.79% from 3.3% in the first quarter. That’s the first time the measure has been below 3% since 2021 and is within the central bank’s target range of 1% to 3%.
“This moderation in inflation expectations will be welcome news for the RBNZ,” said Westpac senior economist Satish Ranchhod.
“Expectations play a central role in how businesses adjust their prices and wages. And the creep higher that we saw over the past few years has added to the risk of a wage-price spiral, which would mean that the current period of high inflation could end up being even more protracted.”
Ranchhod noted the drop back in expectations followed an easing in actual inflation to 6.7% from a peak of 7.3% last year.
There were also increasing signs that domestic demand was responding to the rise in borrowing costs over the past year, he said.
The New Zealand dollar dipped from US62.80 cents to US62.60c after the survey was released at 3pm on Friday.
BNZ senior markets strategist Jason Wong said inflation expectations had pulled back more than expected.
“It will affect sentiment,” he said. “The market will be thinking, is the Reserve Bank really going to tighten again another 25 points, or maybe we have seen the last. That will be the question hanging in the market and that’s why the currency has fallen a little bit.
“It will just raise a question mark over whether or not they do actually go through with another hike or not.”
The Reserve Bank is widely expected to hike the official cash rate by 25 basis points later this month, taking the benchmark to 5.5%.
Wong said he doubted the Reserve Bank would change its path based on one survey, and the currency drop may prove to be fleeting.
“The Reserve Bank was pretty hawkish last time so it’s going to take a lot to move the dial,” he said.
Westpac’s Ranchhod also said that the decline in expectations didn’t mean the Reserve Bank’s job was done.
“Inflation remains elevated,” Ranchhod said. “And while expectations have softened, they remain above the 2% mid-point of the RBNZ’s target band.”
Reserve Bank of New Zealand
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The benchmark S&P/NZX 50 Index gained 0.4%, or 51.081 points, to 11,938.84 on Friday. On the broader market 66 stocks rose and 61 fell with $128 million shares traded.
The Warehouse Group gained 2.9% to $1.77 after the retailer announced sales rose 3.8% to $801.3m in the third quarter.
Within the group, sales at The Warehouse general merchandise discount chain increased 10.5%, while sales at electrical and appliance chain Noel Leeming fell 3.4%, sales at outdoor goods chain Torpedo7 declined 3% and Warehouse Stationery sales slipped 2.5%.
“The economic outlook continues to be challenging and New Zealanders looking for great value has driven continued sales growth at The Warehouse this quarter,” said group chief executive Nick Grayston.
“Other group brands remain challenged as customers continue to control disposable income while cost of living remains elevated and interest rates continue to rise.”
Hamilton Hindin Greene investment adviser Jeremy Sullivan said the company had performed slightly better than the market expected in the latest quarter.
The group reported a 0.9% fall in gross profit to $272.2m in the quarter, an improvement on the 1.2% drop in the first half.
While the gross profit margin slid 160 basis points to 34% in the quarter compared with the year-earlier, it improved from the 32.7% margin reported at the half year.
Serko gained 4.6% to $2.30 after the corporate travel technology company said it expects to benefit from a new partnership between travel management company CWT and Booking.com.
Chief executive Darrin Grafton said the move would bring two of Serko’s partners together through its Zeno technology platform to give business travellers a connected trip experience.
Serko expected to benefit from the expanded offering through increased customer acquisition, although at this stage the company was unable to quantify the size of those benefits and any net positive impact to future revenues, he said.
ASB economist Nat Keall noted in his weekly commodity report that key farm input costs, which surged during 2021 and 2022, were now trending down, although debt servicing remained high.
According to the World Bank’s commodity indices, underlying energy prices have eased about 36% in US dollar terms since their mid-to-late 2022 peak, grain prices have eased about 16%, and fertiliser prices have come off by a whopping 50%, he said.
Increased migration meant labour supply was also set to improve, which meant wage inflation was close to peaking.
However Keall noted that debt servicing costs were proving “extremely stubborn”. The Reserve Bank’s latest Financial Stability Report showed dairy debt servicing costs per kilogram of milk solids produced was running at 12-year highs, in line with the whopper lifts in lending rates over the last 18 months. And that’s despite industry-wide dairy debt down having eased 15% from its peaks.
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