New Zealand Q3 CPI Preview: A modest inflation decline that should keep more rate hikes on the table

• The annual inflation rate in New Zealand is expected to decline from 6% in the quarter to June to 5.9% in the three months to September.
• Markets expect inflation to come in at 2% in Q3 compared with the previous quarter, accelerating from the 1.1% recorded in Q2.
• NZD/USD appears vulnerable following a reversal from two-month highs, moving towards recent lows.

Stats NZ will release on Monday, October 16, at 21:45 GMT, early Tuesday in New Zealand, the Consumer Price Index (CPI) data for the September quarter. The data could be relevant for the New Zealand Dollar (NZD) and the Reserve Bank of New Zealand (RBNZ), which will hold its next monetary policy meeting on November 28-29. 

Annual inflation in New Zealand peaked in June 2022 at 7.3%. Price growth has slowed during 2023, coming in at 6% in the quarter to June, but it remains above the target range of the RBNZ, which is set between 1% and 3%. 

In the second quarter and compared to the previous three-month period, inflation rose by 1.1%, slightly lower than the 1.2% recorded in the previous quarter but higher than the market consensus of 0.9%. Despite persistently high inflation, the RBNZ has maintained the Official Cash Rate unchanged at 5.5% during the last three meetings.

What to expect from New Zealand’s inflation rate? 

The Consumer Price Index (CPI) is expected to have increased by 2% in the third quarter compared with the previous three-month period, accelerating from the 1.1% advance recorded in the second quarter. It would be the first acceleration in the quarterly rate since Q3 of last year. The annual rate is expected to have modestly declined from 6% to 5.9% by the end of September. Such figures, or even a negative surprise with higher-than-expected numbers, will add pressure to the RBNZ, indicating that the current interest rate of 5.50% may not be sufficient to bring inflation back to the target within an acceptable time frame.

“The Committee agreed that monetary conditions are restricting spending and reducing inflationary pressure as anticipated. While supply constraints in the economy continue to ease, inflation remains too high. Spending needs to remain subdued to better match the economy’s ability to supply goods and services so that consumer price inflation returns to its target range”, the RBNZ said at its last meeting on October 4. 

The market expects the RBNZ to keep rates unchanged at the November meeting but sees another rate hike in February. A higher-than-expected inflation reading could bring forward rate hike expectations to the November meeting. Conversely, a significant slowdown in inflation would dampen expectations of an immediate rate hike.

On Saturday, New Zealand held elections, and Christopher Luxon is expected to become the next prime minister. As the results are still being determined, how the government will be composed remains unclear. Uncertainty surrounding the government formation and the election had a limited impact on markets.

When will the Consumer Price Index report be released, and how could it affect NZD/USD?

The Q3 Consumer Price Index (CPI) inflation data will be published at 21:45 GMT on Monday. The NZD/USD pair reached its highest level in two months, above 0.6050, but then experienced a sharp reversal driven by a stronger US Dollar and risk aversion, falling sharply to levels below 0.5900. This reversal has shifted the short-term outlook to neutral.

The main driver of the decline was the Greenback. The US Dollar has remained firm in the market, supported by the latest round of US economic data, which indicates a resilient economy, a tight labor market, and inflation still above the target.

If the NZ inflation numbers exceed market consensus, it could increase expectations for a rate hike at the next RBNZ meeting, leading to a stronger Kiwi. However, a more significant upside surprise in that direction could damage New Zealand's economic growth outlook and, therefore, impact the Kiwi negatively.

The short-term outlook for NZD/USD shows risks tilted to the downside, but losses seem limited as long as the pair stays above the critical support area at 0.5860. A break below would open the doors to further losses, with the next target around 0.5800.

On the upside, the 20-day and 55-day Simple Moving Averages (SMA) are around the 0.5955 zone, making it a significant area of interest. The next resistance level is positioned at 0.5980. However, the critical level to watch is at 0.6050, as it represents recent highs and the 20-week SMA, which acted as a resistance level the previous week. A consolidation above this area would suggest the potential for further gains, with a target set at 0.6150.