Auckland housing. Photo: 123rf
Inflation in the June quarter fell more than the central bank (RNBZ) had expected, with one bank saying cuts to the official central bank rate (OCR) could start as early as next month.
Annual inflation for the 12 months to June 2024 was 3.3%, slightly above the central bank's target of 1% to 3%. The central bank said in May it expected inflation to reach 3.6%.
Tradable inflation, which is influenced by international prices, was just 0.3% in the year to June, while non-tradable domestic inflation was 5.4%, slightly higher than the central bank had expected.
The ASB said the data tilted the risk towards a bigger and earlier rate cut, with November's 25 basis points (bps) cut likely to be the “floor” that the Reserve Bank would need to implement in 2024.
“All remaining OCR decisions for 2024 are effectively 'stand', meaning cuts could start as soon as next month,” the bank's economists said in an update.
“There is a growing risk that the OCR will be cut by at least 50 bps in 2024.”
Bank of New Zealand economists said rental inflation was at its highest since the late 1990s but was likely approaching a tipping point due to worsening economic conditions.
They predicted inflation would fall below 3% in September, allowing the central bank to cut interest rates before Christmas, or sooner if data continues to point to a cooling trend.
“Today's core inflation developments increase confidence that the RBNZ's 2% target will be achieved in 2025. A rate cut is on the way.”
In response to the data, ANZ said it was bringing forward its forecast for an OCR cut to November instead of February as previously expected.
Westpac Banking Corporation also brought forward its rate cut forecast to November.
But there are concerns that some of the remaining problem areas may be harder for the central bank to influence.Housing and household utility costs were the biggest driver of inflation, with rents rising 4.8% annually, interest rates rising 9.6% and new home construction rising 3%.
Premiums have risen 14 percent in a year. Nicola Growden, senior manager of consumer prices at Statistics New Zealand, said the increase in premiums was almost double the previous high in June 2009.
“Increases in home and auto insurance rates have primarily led to higher premiums.”
ASB said inflation, excluding insurance premiums, local taxes, tobacco and alcohol – which are affected by the excise duty hike – fell to 2.4%.
“In the current environment, we do not believe these out-of-pocket cost increases will translate into higher overall inflation. Indeed, they will represent a significant additional cost to households and may have a dampening inflationary impact.”
Gareth Kiernan, chief forecaster at Infometrics, said the RBNZ should “take a closer look” at things like interest rates and insurance and “look more closely at some of the other things it can influence”.
He said it was a “troubling issue” that non-tradable inflation remained higher than expected, but it was unclear how the bank would react.
Gareth Kiernan. Photo: RNZ/Rebecca Parsons-King
“Who knows if they're going to wake up in May and complain about those things or if it's going to be like July and they're going to say, 'She's OK.'”
Kiernan still expects a cut in February, largely because the RBNZ suggested in May that a cut was still a long way off. Bringing it forward now to November would require a big change in thinking from the bank with relatively little data.
ANZ Governor Sharon Zollner said she expected the RBNZ would be more confident in scrutinising things like interest rates and insurance as outliers while other inflation measures fell, and to focus on core inflation rather than overall non-tradable inflation.
“This is the fifth consecutive unexpected upward revision for non-traded goods and we had hoped that this would be the end of it, but there are plenty of details to suggest that cost pressures are easing, making cost increases harder to push through. Overall, this is quite reassuring compared to the concerns expressed by the central bank in May.”
He said there was a “huge” gap between the RBNZ's May forecast of no rate cuts until August and economists' expectations and market pricing.
“But the Reserve Bank is not afraid to change its mind if the facts change.”
Westpac chief economist Kelly Eckhold said the RBNZ would likely provide reassurance on a headline basis with the update.
He said the decline in trade inflation may have been expected given the ripple effects of supply chain disruptions, the relatively stable exchange rate and a retail sector that is under huge pressure and not in a position to defend its profit margins.