2017.10.1810:18:00UTC+00RBNZ May Hike Rates Earlier Than Markets Expect: Capital Economics

The modest rise in headline and underlying price pressures in the third quarter suggest that interest rates may increase a little bit earlier than the Reserve Bank of New Zealand's current suggestion of sometime late in 2019, Paul Dales, an economist at Capital Economics, said.

Consumer prices rose 0.5 percent quarterly in the three months ended September, data from Statistics New Zealand showed on October 17.

The annual growth rate accelerated to 1.9 percent from 1.7 percent. Moreover, the figure, which was higher than RBNZ' s forecast of 1.6 percent, will have come as a pleasant surprise as it leaves inflation close to the center of the 1-3 percent target.

"That's a big turnaround from two years ago when inflation was 0.1 percent and the RBNZ was fretting about deflation," the economist observed.

Underlying prices also strengthened a bit in the third quarter. They rose 0.5 percent quarterly and the annual growth picked up to 1.5 percent from 1.4 percent.

Furthermore, the trimmed mean measure of underlying inflation rose from 1.8 percent to 2.0 percent and non-tradables inflation quickened to a three-year high of 2.6 percent in Q3.

Although, purchase prices of new houses and local authority rates increased strongly, they were not bigger than the seasonal norm, Dales said.

The economist noted that the fall in the annual growth rate of the purchase of new homes from 6.4 percent to 5.4 percent is a sign that price pressures in the housing market are easing.

"Overall, it is encouraging that there are some signs that the rapid rates of economic growth in recent years are supporting underlying price pressures," the economist pointed out.

"But with signs emerging that GDP growth may be close to its peak, core inflation is unlikely to rise to the midpoint of the 1-3 percent target for a couple of years yet."