Inflation update soothes fear Reserve Bank might back off 0.5% rate cut

Thursday, 23 January 2025

With price rises for discretionary items easing faster than some essentials, families will still be feeling the squeeze, the Opposition argues.

Financial markets have resumed fully pricing-in a 0.5% cut in the official cash rate next month, after Stats NZ released a relatively benign update on inflation on Wednesday.

The development is a welcome sign for home-owners banking on further cuts in interests rates after the Reserve Bank next meets to review interest rates on February 18.

Reserve Bank governor Adrian Orr gave an unusually strong signal in November that a 50 basis point cut that would take the OCR down to 3.25% was on the cards next month, bar any major surprises.

But doubts have emerged it would stick to that plan in the face of a falling New Zealand dollar that could contribute to an uptick in inflation later this year.

Finance Minister Nicola Willis says the latest inflation figures suggest there is scope for further interest-rate reductions.

Stats NZ reported annual inflation came in unchanged at 2.2% in the December quarter, a fraction higher than the Reserve Bank and many forecasters had been expecting, but roughly in line with expectations.

ANZ Bank senior economist Miles Workman said any disappointment about the headline inflation figure was likely to be offset by the fact so-called “non-tradeable” inflation fell further than expected, from 4.9% to 4.5%.

Non-tradeable inflation, also sometimes referred to as domestic inflation, measures changes in the prices of goods and services whose prices are largely determined by the domestic economy, as opposed for example to imports, and tends to be of more concern to the central bank.

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”, Workman said.

BNZ research head Stephen Toplis had a similar view.

“On balance the ‘doves’ seem to have just gained the upper hand in terms of market pricing with the market edging back to fully pricing-in a 50 basis point cut at the February meeting.”

Finance Minister Nicola Willis pointed to the drop in domestic inflation as a sign progress on prices was still being made and went further than usual in suggesting how the figures might be interpreted by the Reserve Bank.

Decisions about the official cash rate were a matter for the Reserve Bank, but the decline in domestic inflation was good news for people with mortgages, Willis 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.”

Labour finance spokesperson Barbara Edmonds said the detailed breakdown of inflation showed people would be struggling with rising rents, rates and insurance costs, however.

Rents were up 4.2% on average on the same quarter in 2023 while local government rates were up about 12%.

A 9.2% drop in petrol prices helped offset that, but Edmonds said many families would be feeling the squeeze.

Supporting that, Infometrics economist Brad Olsen said prices for “some of the more essential costs” New Zealanders faced were either still increasing or were not tempering as much as people might have hoped.

Many goods and services that had become less prone to inflation were discretionary items, that shops had needed to discount, he said.