New Zealand inflation retreats in second quarter, outlook subdued

By Wayne Cole

SYDNEY (Reuters) - New Zealand consumer prices fell by the most in four years last quarter as much of the economy closed to fight the coronavirus, while a collapse in global oil prices dragged petrol costs down sharply.

The consumer price index (CPI) fell 0.5% from the first quarter, when it had climbed 0.8%. That was bang in line with market forecasts and left the local dollar untroubled <NZD=D3>.

Thursday's data came with a statistical health warning as goods and services simply could not be bought in April and May, so prices for them had to be imputed.

"The COVID-19 pandemic has created a lot of volatility and uncertainty," said Aaron Beck, prices senior manager for Statistics New Zealand.

"These have resulted in some large price fluctuations as well as several measurement challenges."

Some services were offered for free, including public transport, while hotel prices dived amid widespread closures.

The annual pace of CPI growth braked to 1.5%, from an eight-year high of 2.5%. That was a setback for the Reserve Bank of New Zealand (RBNZ) which has spent almost a decade trying to get inflation above the middle of its 1%-3% target band.

The central bank has already responded to the pandemic by slashing interest rates to a record low of 0.25% and launching a massive NZ$60 billion (31.33 billion pounds) bond-buying campaign.

Growth has clearly rebounded in the last month as the country all but eliminated the virus allowing a re-opening of the economy. But with unemployment set to rise and wages subdued, the outlook is a muted one.

"We think that weak demand will trump supply-side disruptions over the medium term, leading to lower inflation pressures, and the economy is likely to remain below full employment for years to come," said Westpac senior economist Michael Gordon.

(Reporting by Wayne Cole; Editing by Stephen Coates)