THE TAKEAWAY: New Zealand consumer prices report 0.8 percent gains > CPI figures below RBZN target could prompt response > Kiwi sold
The Kiwi sold sharply lower versus the US Dollar amid concerns a slowing New Zealand economy highlighted by contracting production and rising unemployment has put a squeeze on inflationary targets set by the Reserve Bank of New Zealand. Earlier today at 21:45 GMT consumer prices reported 0.8 percent increase in the third quarter narrowly falling below the RBNZ’s 1 to 3 percent medium term inflation target. Moreover, prices for consumer products have fallen from 5 percent in June 2011. Such a drop may reflect weakness in the labor market as measured by an uptick in unemployment and reduced take-home pay.
The below target inflation rate mixed with ebbing activity measures may prompt policy officials to reduce borrowing costs in an attempt to encourage credit growth and accelerate general activity hopefully stoking inflation rates. Currently markets appear to be pricing in a 16 percent probability of 25 basis point reduction to rates by the RBNZ during their next meeting on October 24. If inflation targets continue to disappoint and activity levels remain depressed, then the chance of further rate cuts may be more-than-remote which should ultimately reflect in market expectation readings.
NZD/USD, 1 Minute Chart