Did inflation data set back chance of OCR cut?
Thursday, 18 April 2024
CPI data on Wednesday showed the annual rate of inflation had slowed to 4%.
Domestic inflation is proving stickier than expected, which some economists said could concern the Reserve Bank.
But others say things are still going according to plan.
New inflation data probably wasn’t cause for celebration at the Reserve Bank - but was it enough to push out the possibility of cash rate cuts?
The consumer price index for the March quarter showed inflation running at an annual rate of 4%.
But while the rate continued to soften, that was largely due to international factors. Domestic inflation remained stubborn.
“The decline in price pressure came from offshore,” Kiwibank chief economist Jarrod Kerr said.
“Tradables inflation fell to 1.6%…That’s great, we’ll take it. But the domestically generated inflation surprised on the upside. Non-tradables fell just 0.1% to 5.8%. It’s not enough.”
ASB economists said it might even be enough of a worry for the Reserve Bank to push out any chance of an official cash rate cut.
Many commentators are expecting the official cash rate could start to be lowered from November.
ASB said that was now in question.
“The price pressures were broad based enough to concern the Reserve Bank that recent downward momentum could be stalling.
“The data highlight that the last per cent or so of disinflation may be hard won, something the Reserve Bank is acutely aware of.
“We don’t think the data will prompt the Reserve Bank into doing more, so to speak. Activity data are very weak and highlight that monetary policy is working. However, absent of clear evidence that domestic and core inflation measures are heading back to target, the risk is clearly skewed to the Reserve Bank joining the slower to lower camp of central banks. As a result, we now think the Reserve Bank will wait until February 2025 to cut the OCR.”
But Mike Jones, chief economist at BNZ, said he did not see anything in the release to change his view.
“The increase was bang on consensus and, while inflation printed higher than the Reserve Bank’s February forecasts, this was well flagged in the bank’s commentary last week.
“Yes, elevated services and non-tradable inflation is still a concern. But, for us, the key thing is that annual inflation is still expected to be back within the 1% to 3% target range by September. This being so we remain of the view the bank can cut rates before the end of the year.”
Infometrics chief forecaster Gareth Kiernan agreed.
“I’m not sure that there’s enough in today’s data to warrant a change of view. To make the change, one probably also has to assume that non-tradable inflation will remain higher throughout the next 12 months and beyond and therefore warrant more restrictive policy for longer from the Reserve Bank.
“Given the current chatter about local government rates, insurance costs, and household utility costs, I can see how that’s a concern. But if headline inflation is under 3% by the end of this year and the Reserve Bank is setting monetary policy in a forward-looking fashion, they should have enough information by the end of 2024 to start cutting interest rates, knowing that the full effect on the economy will take nine to 18 months to come through.
“It’s also worth remembering that an OCR above 4% is still effectively acting as a restraint on the economy, so until they get it back to that level, it’s still limiting economic growth, at the same time as fiscal policy is also heavily limiting economic growth.”
UBS economists said other data had been weaker than expected lately, and inflation had still fallen faster than the Reserve Bank was projecting six or 12 months ago.
“Our base case remains the Reserve Bank will wait until they have confirmation CPI has returned to their target band, before cutting rates by 25bps in November.
They said when the bank started cutting it would cut relatively quickly.
“We still see a terminal rate of 3.25% by the end of 2025, which is below our estimate of the nominal neutral cash rate of ~3.5%… We have one rate cut of 50bp in February; but we also still see risk of a more front-loaded easing cycle. Indeed, a scenario of the Reserve Bank cutting ahead of the Fed is looking increasingly plausible.
Jarden investment strategist and economist John Carran said while the Reserve Bank would not be jumping with relief, the inflation data was unlikely to materially change its stance.
“We continue to expect a weakening New Zealand economy and labour market, together with continuing declines in international goods prices to put downward pressure on CPI inflation in the foreseeable future. This should allow the Reserve Bank scope to start cutting the OCR towards the end of 2024.”