Talking Points:
- New Zealand surged following better-than-expected CPI data
- Prices rose 2.2% y/y versus 2.0% expected, highest since 2011
- Front-end bond yields rose, hinting at firming RBNZ outlook
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The New Zealand Dollar rallied against its major counterparts following a better-than-expected CPI report. Prices rose 2.2 percent y/y versus 2.0 percent expected and 1.3 percent in the fourth quarter of 2016. This brings the headline inflation rate to its highest in over five years.
Consumer prices rose 1.0 percent compared with the prior quarter, topping bets for a 0.8 percent gain and the 0.4 percent increase recorded in the three months to December 2016. This is the strongest reading since December 2010.
New Zealand front-end government bond yields rose as the CPI figures crossed the wires, signaling firming RBNZ rate hike expectations. Overnight index swaps are pricing in an 80 percent probability that the central bank will hike its official cash rate once over the coming 12 months.
In March, the RBNZ said that CPI will be variable over the next year but will return to the midpoint of the target band (1- 3%) over the medium term. Nonetheless, Governor Graeme Wheeler said that policy will remain accommodative for a “considerable period” as numerous uncertainties remain, especially with respect to the international outlook.
Chart created in TradingView
