Hopes of early interest-rate cut rise slightly as inflation falls to 3.3%

Wednesday, 17 July 2024

Annual inflation dropped to 3.3% in the three months to the end of June, down from 4% the previous quarter, Stats NZ has reported.

Stats NZ senior manager Nicola Growden said inflation had now fallen to levels seen about three years ago, though she noted it was still above the top of the Reserve Bank’s 1% to 3% target band.

Westpac chief economist Kelly Eckhold said the figures probably made an earlier interest-rate cut from the Reserve Bank marginally more likely, though not unequivocally so.

Kiwibank, which has been forecasting a rate-cut in November, said prospects for “an even earlier cut” were rising while ASB senior economist Mark Smith said underlying price pressures were cooling rapidly, and ANZ described the figures as “reassuring”.

Domestic inflation had been slower to cool, “but this is partly reflective of cost-driven influences that monetary policy should seek to look through”, Smith said.

Finance Minister Nicola Willis said the drop in inflation represented “progress in economic recovery” and showed the Government was turning the economy around.

“When interest rates also begin to fall, it will give New Zealanders real cost-of-living relief and allow our economy to kick back into gear,” she said.

But Green Party housing spokesperson Tamatha Paul said the detailed data showed the “everyday struggle for renters is worse than ever”.

The latest figures and the direction of travel of inflation are expected to be front and centre of the Reserve Bank’s mind when it meets late next month to issue its next monetary policy statement and considers when it might cut the 5.5% official cash rate.

The Reserve Bank had forecast in May that annual inflation would come in at 3.6% in the June quarter, but economists had since become confident of a larger drop.

ANZ and ASB were both tipping inflation would come in at 3.3%, while BNZ and Westpac had forecast it would be 3.5%, with Kiwibank having forecast 3.4%.

The difference between the forecasts and the actual number is a guide as to whether the market is likely to become more hopeful of faster or steeper interest-rate cuts.

However, the components of inflation, and in particular whether it is driven by domestic price pressures or changes in the prices of goods and services whose prices are mainly determined internationally, including imports, is something the Reserve Bank also watches closely.

Stats NZ reported that the annual rate of so-called “non-tradeable inflation”, which covers the former category of good and services, and which is most-closely watched by the Reserve Bank was 5.4% in the June quarter.

That was down from 5.8% recorded in the March quarter, but a slightly smaller improvement than the drop to 5.3% forecast by ANZ.

Stats NZ reported increases in the prices of rent, insurance, and cigarettes and tobacco were the main drivers of domestic inflation.

Rents increased 4.8% in the 12 months to the June 2024 quarter, while rates rose 9.6%. The price of insurance premiums rose a whopping 14%.

The New Zealand dollar was trading slightly higher an hour after the inflation data was released, which is the opposition direction of travel from that which could be expected if hopes are rising of interest-rate cuts.

Eckhold said the explanation was that financial markets appeared to have previously priced-in a “very optimistic scenario across all of the details”.

While it was fair to say the inflation figures probably made an earlier rate cut more likely that it had been yesterday before they came out, that was not unequivocal, he said.

“The drop in headline inflation will be comforting to the Reserve Bank.

“It has obviously come in lower than its May forecast, and probably lower than it was expecting when it released a relatively dovish statement last week,” he said, referring to the central bank’s most recent monetary policy review.

But domestic inflation measures were “a bit stronger than expected”, he said.

“So that will be something that will be a consideration also.”

Moody’s Analytics economist Shannon Nicoll went a bit further, describing the figures as “bitter-sweet”.

“While the good news still outweighs the bad, sticky services inflation represents a real challenge for the central bank. If these pressures can't be addressed in the near term, the sustainability of inflation remaining in target will be challenged,” she said.