Fall in US inflation provides some hope for NZ home-loan borrowers

Monday, 14 November 2022

Inflation appears to be retreating quickly in the US.

A bigger than expected drop in inflation in the United States is raising hopes that central banks, including New Zealand’s Reserve Bank, may not need to raise interest rates as high as feared.

The US Bureau of Labour reported that prices rose by 0.4% in October in the US, bringing its annual inflation rate down to 7.7%, from 8.2% at the end of September.

Analysts had been expecting US annual inflation to come in at about 7.9% and the positive development put a rocket under sharemarkets, helping the S&P 500 index to close the week 5.9% higher.

ASB chief economist Nick Tuffley said the US data provided some reassurance that the US Federal Reserve’s monetary policy tightening was starting to take effect.

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Like most banks, ASB still expects the Reserve Bank will raise its official cash rate by 75 basis points to 4.25% when it releases its next monetary policy statement on Wednesday next week, after a series of 50bp raises earlier in the year.

But Tuffley said the slower pace of monetary-policy tightening in other countries was influencing market views on whether the Reserve Bank “would really step up the pace at this relatively late stage” in the tightening cycle.

Kiwibank also noted that the softer US inflation numbers had impacted New Zealand markets.

It believed that little had changed for the Reserve Bank when it came to assessing its options for next week’s meeting.

But it said it suspected that by the time the Reserve Bank “comes back from its three-month summer holiday”, in February, “global economic data may have softened enough to ease concerns around inflation”.

BNZ research head Stephen Toplis said that if it was up to BNZ it would only raise the OCR by 50bp next week but suggested the Reserve Bank “would not want to appear to be going soft on inflation” and might be influenced by market expectations for a 75bp rise.