ANZ trims interest-rate forecast after inflation comes in unchanged

Wednesday, 25 January 2023

The consumer price index (CPI) records changes in the price of hundreds of goods and services. (First published January 20, 2022)

The country’s biggest bank has revised down its forecast for interest rate rises after Stats NZ reported that annual inflation was unchanged at 7.2% in the three months to the end of December.

Economists have given different views on the latest inflation figures, but ANZ took heart from the fact that inflation was not as bad as the Reserve Bank had forecast and that home-grown inflation appeared to have stabilised.

ANZ had been forecasting the Reserve Bank would raise the official cash rate (OCR) by 75 basis points to 5% next month and to a high of 5.75% later in the year.

But it is now forecasting a 50bp rate hike next month and for the OCR to peak at 5.25%.

“Signs that inflation will ease meaningfully over 2023 are becoming increasingly clear,” it said in a research note.

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Inflation generic, economy, spending, cost of living, shopping, money

Kiwibank also cut its forecast to a 50bp rise in February, from 75bp, and now expects the OCR to peak at 5% in the current cycle.

The annual movement in the consumer price index had previously been measured at 7.2% in the September quarter, after peaking at a 32-year high of 7.3% in the June quarter.

Most bank economists had been expecting inflation to slip back slightly to 7.1%, though the Reserve Bank had forecast in November that it would hit a fresh high of 7.5% and ANZ had tipped it would remain unmoved at 7.2%.

Higher food prices, airfares and stubbornly high house construction costs were largely responsible for keeping inflation running hot.

Stats NZ reported that grocery food prices were up 10.2% over the year, and “passenger transport services” were up 12.6%, driven by steep increases in both international and domestic airfares which were up 14.1% and 18.9% respectively over the quarter.

National leader Christopher Luxon said part of the Government’s response to stubborn inflation should be adjusting immigration settings.

Finance Minister Grant Robertson said the Government was doing its bit by bringing down its spending to more normal levels, citing a Treasury forecast that government consumption would fall by 8.2% in real terms over the next couple of years.

It was also tackling the underlying causes of high prices by “taking action at the petrol pump and supermarket check-out to improve competition”, he said.

But National Party leader Christopher Luxon said the inflation figures were disappointing and the Government had no plan to solve the underlying issues.

The things the Government should do were ideas National had been talking about for a year, he said.

“Don’t pass costs onto businesses who can’t afford it because they only pass it onto consumers with higher prices, make sure you open up our immigration settings so we can get growth into the productive economy, control government spending, and get the Reserve Bank into fighting inflation.”

Kiwibank senior economist Jeremy Couchman said there were some positive signs.

MPI reports up to 40% of flights on any given day have been arriving late, which is causing airport congestion.

“Headline inflation remains uncomfortably high, however there are signs we are past the peak in the current cycle. Cost of construction is starting to come back which is consistent with a housing market that is cooling pretty rapidly.”

But Infometrics principal economist Brad Olsen said it was concerning that the latest figures showed inflation was very broad based, with 72% of the items tracked by Stats NZ rising in price, which he said was the second-highest on record.

“It is the sustained broadness in inflation that is worrying and says we haven’t done enough yet.”

Westpac senior economist Satish Ranchhod said the main surprise was the size of the rise in airfares.

ASB senior economist Mark Smith said the figures suggestedannual inflation was likely to have peaked mid last year and was likely to cool this year, but that the withdrawal of government transport and fuel subsidies could slow that decline.

He said there was still enough “under the surface” to concern the Reserve Bank, which ASB and Infometrics still expected would raise the OCR by 75 basis points to 5% next month.

Initial market reaction to the inflation figure appeared hard to discern, with the New Zealand dollar briefly spiking above US 65 cents before shedding that gain, and the yield on two-year government bonds easing 9 basis points to 4.43% by noon.

The NZX “top 50” share index was essentially static, up less than 2 points at 11932 in late morning trading.

Although annual inflation was unchanged, the quarterly increase in prices was the lowest since the December quarter last year at 1.4% and down from a 2.2% jump in the September quarter.

So called tradeable or “imported” inflation, which is the rise in prices of goods and services that are largely priced overseas and determined by international factors, came in at 8.2% over the year, while non-tradeable inflation was 6.6%.

That mix was little changed on the September quarter, meaning domestic inflation became no less of an issue.

New Zealand’s inflation rate is not out of line internationally.

Annual inflation was last measured at 7.3% in Australia, 6.5% in the United States, 10.5% in the UK and 10.3% across the OECD as a whole.