NZ CPI inflation hit 1.4% in 2020, above expectations

NZ's consumers price index rose by 0.5 per cent in the December quarter, driven mostly by higher transport costs. Photo / Bay of Plenty Times

New Zealand inflation hit a higher-than-expected 1.4 per cent over 2020, reinforcing market expectations that the Reserve Bank's lowest ever official cash rate (OCR) will fall no further.

The consensus of market forecasts was for a 1.1 per cent gain in the annual consumers price index.

For the quarter, the CPI rose by 0.5 per cent, driven by higher transport and accommodation costs, Stats NZ said.

The Reserve Bank is charged with trying to maintain annual inflation within a 1 to 3 per cent range, with a 2 per cent mid-point, while also aiming for maximum sustainable employment.

Kiwibank chief economist Jarod Kerr said the Reserve Bank's inflation and employment mandates were are far from being met.

"But the rampant advances in the housing market have surely taken a negative cash rate off the table," he said in a commentary.

Kiwibank now expects the OCR to be left unchanged, well into 2022.

A growing list of economists now expect the current rate of 0.25 per cent to be the low point, now that the risk of deflation appears to be waning.

Westpac this week changed its OCR forecast.

The bank now expects that the OCR will remain on hold at 0.25 per cent for the foreseeable future, having earlier expected it to drop to minus 0.25 per cent this year.

ASB said risks of higher inflation were accumulating to the medium-term inflation outlook, but the Reserve Bank was expected to maintain "highly stimulatory" settings until it was confident that economic activity and the labour market have turned the corner.

"The diminished risk of deflation suggests that the OCR is unlikely to move lower from its current 0.25 per cent low," ASB said.

"The RBNZ is expected to maintain highly stimulatory settings until it is confident that economic activity and the labour market have turned the corner.

"Our view is that the OCR is unlikely to move up in 2021, but the resilient tone of New Zealand data is a reminder that the OCR won't stay at record lows forever," it said.

Capital Economics, which expects the Reserve Bank to be the first in the developed world to starting to raise rates next year, said business surveys are already pointing to a renewed surge in headline inflation.

"We think inflation will remain around current levels in the first quarter and rise strongly thereafter," it said.