Commerzbank’s Volkmar Baur describes a double bind for the New Zealand Dollar as rising monthly price indices signal higher CPI, while electronic card data show stagnating retail spending and likely negative real consumption. With markets pricing an 80% chance of a Reserve Bank of New Zealand rate hike in two weeks, he remains cautious and flags next week’s CPI as crucial.

RBNZ caught between inflation and growth

“Two data points released this morning nicely illustrate the difficult position the Reserve Bank of New Zealand currently finds itself in. The monthly price index, which covers roughly half of the components of the full CPI data that are only released quarterly, rose sharply to 5.2% year-on-year in September. Energy components were a major driver of the increase, but inflation excluding petrol and diesel also accelerated, from 3.2% in August to 3.6% year-on-year in September.”

“At the same time, electronic card transactions point to stagnating retail sales. Seasonally adjusted spending fell by 0.4% compared with August, and even that figure was only cushioned by a marked increase in spending on petrol. Excluding petrol, spending declined by 0.7%.”

“Moreover, these figures are nominal. Adjusting for price increases suggests that real consumption growth in New Zealand is currently likely to be clearly negative in year-on-year terms.”

“The RBNZ therefore faces a difficult decision when it meets for its next monetary policy meeting in around two weeks. Given the renewed rise in inflation, the market currently assigns a probability of roughly 80% to a rate hike. However, the weakness of economic activity and the continued absence of visible second-round inflation effects make me somewhat more cautious.”

“Against this backdrop, next week’s full CPI release will attract even more attention than usual.”