New Zealand’s inflation unexpectedly remained above the upper limit of the Reserve Bank’s 1%–3% target range in the first quarter, leading markets to increase expectations of a possible interest rate hike in July, as the anticipated Iran-war-driven rise in fuel prices has yet to fully feed through.
According to Statistics New Zealand data released in Wellington, the consumer price index rose 3.1% year-on-year, matching the previous quarter but exceeding the 2.9% forecast.
Prices also increased 0.9% quarter-on-quarter, above expectations of a 0.8% gain, Bloomberg reports.
The Reserve Bank of New Zealand (RBNZ) has provisionally projected inflation to rise to 4.2% in the second quarter, while some local economists expect it could climb even higher and remain above the top of the target range until 2027.
With the risk of persistent inflation becoming embedded in the economy, markets now expect the central bank may raise interest rates sooner than previously indicated.
Following the data, the New Zealand Dollar gained 0.4% to 59.12 US cents, while yields on two-year government bonds rose eight basis points to 3.5%, as traders increased bets on an RBNZ rate hike.
Markets are now fully pricing in a rate hike in July, up from around a 75% probability before the inflation data release.
Central bank governor Anna Breman said policymakers are worried that medium-term inflation pressures may be building and are prepared to respond decisively with interest rate increases if needed.
While most local economists expect the official cash rate to begin rising in September, a smaller group anticipates that a move could come as early as July.
Policymakers are aware that higher energy prices stemming from the Middle East conflict are likely to weaken household spending on non-essential goods and dampen hiring, which in turn could slow economic growth.
Meanwhile, oil and natural gas prices surged on Monday after the US Navy seized an Iranian vessel amid a turbulent weekend that also saw attacks on ships and renewed restrictions in the Strait of Hormuz.
Moreover, in New Zealand, a report released this week showed business confidence fell to its weakest level since mid-2024 in the first quarter.
Companies are signalling plans to cut investment and reduce staffing as rising costs continue to squeeze profits.
The data also showed that imported, or so-called tradables, prices rose 2.5% year-on-year, easing slightly from 2.6% in the fourth quarter. The increase was mainly driven by higher meat and poultry prices, according to the statistics agency.
In addition, annual non-tradables inflation, a closely watched measure of domestic price pressures, held steady at 3.5% in the first quarter, unchanged from the previous three months.
According to the statistics agency, the main contributors to the annual rate were electricity costs and local council property taxes.
On a quarterly basis, petrol prices rose 3.5%, while other fuels and lubricants, including diesel, jumped 11%.