New Zealand's Consumer Price Index (CPI) dropped by 0.5% in Q4 2015, lower than Westpac's below-market projection of a drop of 0.4%. Meanwhile, the country's annual inflation rate declined to just 0.1% from 0.4%. The drop in Q4 was mainly due to the lower fuel prices. However, another significant factor was the weakness in tradable goods prices in spite of the cumulative depreciation of the New Zealand dollar in 2015.
The Reserve Bank of New Zealand had forecast annual inflation rate to be stable at 0.4% and increase to 1% in the beginning of 2016. However, the 1% rise will not take place in the forecast time period. Moreover, if oil prices continue to be low, inflation is likely to decelerate below zero sometime later in 2016.
"The persistent undershoot of the inflation target reinforces our long-held view that the RBNZ will cut the OCR further this year, from 2.5% to 2.0%", says Westpac.
There is a high possibility that rate cut might take place in the March review due to the weaker than expected inflation data, easing of Auckland housing market and lower dairy prices. The central bank's OCR review in the next week will give the RBNZ a chance to move in the direction of an explicit easing bias.
Post the release of CPI data, the New Zealand dollar depreciated from 0.6470 to 0.6400, while the OCR is expected to be lowered by 25 basis point by June, with a certain possibility of a second rate cut.