Finance Minister says 2.2% inflation ‘good news for people with mortgages’

Wednesday, 22 January 2025

Finance Minister Nicola Willis is talking up the potential for further interest rate cuts after Stats NZ reported annual inflation at 2.2% in the three months to the end of December, unchanged from the previous quarter.

The Reserve Bank, along with ASB, Kiwibank and Westpac, had all been picking inflation to come in at 2.1%, while ANZ and BNZ had tipped it to tread water at 2.2%.

Importantly, the driver of inflation is changing, with more inflation attributable to so-called tradeable inflation caused by stronger prices for imports and other goods whose prices are effectively set overseas.

Non-tradeable or domestic inflation which is usually regarded as more of a concern for the Reserve Bank fell to 4.5% from the 4.9% annual rate recorded in the September quarter.

Finance Minister Nicola Willis seized on the drop in domestic inflation as evidence progress was still being made.

“Decisions about the official cash rate are a matter for the Reserve Bank but the decline in domestic inflation is good news for people with mortgages,” she said.

“Together with other recent economic data showing there is spare capacity in the economy, it suggests there is scope for further rate reductions in the coming months.”

The Reserve Bank is due to meet on February 18 to reset the official cash rate.

Before Wednesday’s inflation update, a cut of either 0.25% or 0.5% had been seen as most likely.

ANZ senior economist Miles Workman said the Reserve Bank wouldn't welcome the slightly higher-than-forecast headline inflation.

But a “small downside miss on non-tradeable inflation” should trump the small upside miss on the tradeable side, meaning a 50bp cut in February remained appropriate, he said.

Infometrics principal economist Brad Olsen said it was encouraging that inflation had not re-accelerated.

“There were a lot of moving parts in the inflation data, and I think that it's now becoming a bit more difficult to figure out what trend we should all be looking at. Previously, when inflation was going up and up at quite a pace, it was just about everything,” he said.

“Now you've got a number of different trends. You've got some of the more essential costs that New Zealanders have to look out for are still either increasing or certainly haven't slowed down as much as people might have hoped.”

But there were other items that were either getting cheaper or under much less pricing pressure, he said.

“They're often the things that New Zealanders don't need as much, and that's because they're not buying them, and shops are having to do a bit more discounting.”

He agreed the Reserve Bank was most likely to press ahead with a 50bp rate cut.

“But they'll also be alert to the fact that on the tradeable side, imported inflation was likely to be hotter than they expected going forward.”

There meant there was still a question mark over how much further interest rates would fall and how close they were to the bottom, he said.

“We’re probably closer to the bottom than some people think.”

The Reserve Bank has been expecting inflation to hover at or just above 2% during the first half of this year before climbing to about 2.5% for the second half of the year.

But BNZ is among those wary of an earlier pick-up. Prior to today’s announcement, it forecast inflation would climb to 2.5% in the current quarter.

“This is the second consecutive quarter that the annual inflation rate has been within the Reserve Bank of New Zealand’s target band of 1 to 3%,” Stats NZ spokesperson Nicola Growden said.

Between the June 2021 and June 2024 quarters annual inflation was above the target band.

“Prices are still rising, but not as much as previously recorded. the most recent peak was in the June 2022 quarter when the annual inflation rate reached 7.3%” Growden said.

Rent was the largest contributor to annual inflation, up 4.2%, accounting for nearly a fifth of the annual increase.

Olsen said Wellington rents were only up 1.8%, quite low relative to some of the increases in other centres and reflected the job losses in the capital.

Local authority rates and payments were up 12.2% in the year to December quarter, mainly due to the annual tobacco excise tax increase on January 1.

Petrol prices were down 9.2% and helped to offset rising prices. This included the removal of the 10 cents per litre Auckland regional fuel tax on June 30.

Petrol made up 4% of the CPI basket and made a significant contribution to the slower increase in annual inflation, Growden said.

Olsen said food price inflation had re-accelerated because dairy prices had gone up.

“That's, of course, not good news for households wanting to buy butter and milk and similar, but it is good news for dairy farmers who are selling their product for more on the international stage”.

The rural versus city variation was starting to come through in terms of where some of the winners and losers on inflation sat, he said.

Vegetable prices were down 14.6% led by falling price for kumera, potatoes and onions.

The cost of flying overseas rose 6.6% and domestic airfares were 9.3% more expensive.