New Zealand dollar steady as inflation miss leaves hawks unruffled

SYDNEY: The New Zealand dollar held its ground on Thursday as inflation data came in a shade under forecasts, but not enough to shake expectations for a rate hike next week, while the Australian dollar hovered near three-week highs.

The figures showed consumer prices rose 0.7% in the third quarter, nudging the annual pace down to 3.7% from 4.1%.

However, much of the slowdown reflected a fall in fuel prices that have since rebounded sharply, leaving inflation expected to top 4% again this quarter.

Measures of core inflation were also on the high side, leading investors to price in a 100% chance the Reserve Bank of New Zealand will raise its official cash rate a quarter point to 3.0% when it meets on October 28.

“We think the RBNZ will regard this as the path of least resistance, and we now expect that they will deliver a hike,” said Satish Ranchhod, a senior economist at Westpac.

“Previously, we expected that they would pause and assess, before hiking in December.”

Markets also imply further tightening next year to at least 3.75%, well above the RBNZ’s own projection of 3.2%.

That helped keep the kiwi dollar steady at $0.5705, after rising 0.3% overnight to a one-month top.

Resistance lies around $0.5750, with support at the recent 18-month trough of $0.5566. The Aussie edged up to $0.7035, having risen 0.4% overnight in its fourth consecutive session of gains.

A break of $0.7045 would open the way for a return to $0.7140, while major support is down at $0.6895.

The currency got a lift on Wednesday when Reserve Bank of Australia Deputy Governor Andrew Hauser warned that the outlook for inflation was “materially worse” than projected given high oil prices and a lack of spare capacity at home.

Markets reacted by doubling the probability of a quarter-point rate rise in November to 64%. Rates are already at a 15-year high of 4.6% after four hikes this year.

“The RBA continues to see risks to inflation and inflation expectations as tilted to the upside even with the delivered 100bp tightening year-to-date,” said Andrew Boak, an economist at Goldman Sachs.

“In our view - absent a downside surprise in third-quarter inflation data - this makes a further hike in November more likely than not.”

Goldman had previously expected the RBA to hold at 4.6%.

The consumer price report for the third quarter is due next week and analysts suspect core inflation could rise a hefty 1.0%, leaving the annual pace at 3.6% and well above the RBA’s target band of 2% to 3%.