New Zealand's annual inflation accelerated in the fourth quarter to 3.1%, above the central bank's target range, reinforcing its recent decision to signal an end to the monetary easing cycle and supporting expectations for rate hikes later this year.
The consumer price index rose 0.6% in the fourth quarter from the previous quarter, up from 0.5% in the third quarter, Statistics New Zealand said. Annual inflation was 3.0% in the third quarter.
Inflation came in higher than both a Reuters poll, which forecast quarterly inflation of 0.6% and annual inflation of 3.0% and the central bank's forecast of annual inflation of 2.7% at its last policy meeting in November. The Reserve Bank of New Zealand has a target annual inflation range of 1% to 3%.
The New Zealand dollar hit a four-month high of $0.5929 following the release of the data as markets priced out any chance of further rate cuts and increased bets on hikes later in the year, while 90-day bank bills fell 7 basis points.
Kiwibank Chief Economist Jarrod Kerr said the higher-than-hoped inflation meant "rate cuts are pretty much off the table now."
"The market's now gone for pricing two hikes this year, which to us, is aggressive, but then you see data like we've seen today, and it's certainly not unrealistic," he added.
The central bank cut the cash rate by 25 basis points at its last meeting in November to 2.25%, taking its total easing to 325 basis points since August 2024 in response to persistent weakness in the economy. But the RBNZ signalled in November an end to the easing cycle on signs that growth was picking up.
It noted at the time that while inflation was at the top of its band, it expected a return to around 2% by the middle of this year.
Inflation Drivers
Inflation has come off its recent peak of 7.3% in the June 2022 quarter but it has now increased each quarter since the fourth quarter of 2024. Statistics New Zealand said increases in electricity, local government taxes and house rents were the biggest contributors to inflation.
ASB Senior Economist Mark Smith said in a note there were signs that the improving consumer demand backdrop was resulting in firms scaling back discounting.
He added that ASB was less sanguine on the inflation outlook than the central bank and feared a tick-up in surveyed pricing intentions as demand recovers will halt the push lower in generalised inflation.
Annual non-tradeable inflation was 3.5%.
Uncertainty around U.S. tariff policies and geopolitical tensions continues to influence inflation expectations and monetary policy decisions.
The New Zealand government, which this week announced a general election in November, is banking on inflation tempering as it aims to convince citizens that it is a safe pair of hands to manage the economy.
(Reporting by Lucy Craymer; Editing by Edmund Klamann and Jamie Freed)
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