Lower-than-expected inflation boosts chance of August rate cut

Monday, 21 July 2025

Inflation data is no roadblock to an interest rate cut in August, says ANZ senior economist Miles Workman.

Finance Minister Nicola Willis has signalled the Government will continue to pile the pressure on councils to limit rate rises, despite inflation increasing by a little less than expected today.

Stats NZ reported annual inflation increased to 2.7% in the three months to the end of June, up from 2.5% previously.

Bank economists had all been expecting annual inflation would be recorded at 2.8% or 2.9%, bringing it to within a whisker of the 3% top-end of the Reserve Bank’s target band.

ANZ senior economist Miles Workman said the actual number was “good news for the Reserve Bank” and should help cement expectations of a 25-basis-point cut to the 3.25% official cash rate when it releases its next monetary policy statement on August 20.

Ahead of Stats NZ’s update, financial markets had been pricing in about a 70% chance of a rate cut next month, but that increased to a more than 80% chance afterwards, he said.

The lower-than-expected inflation will be a relief to the Government, which has talked up the potential for falling interest rates to revive the economy.

There remain inflation risks ahead, however.

The drop in the price of petrol had come to the rescue, says Council of Trade Unions economist Craig Renney.

Stats NZ noted it only factors-in rising council rates bills into its inflation data once a year, during the three months to the end of September, and many economists expect they will push inflation higher in the third quarter.

Willis said she remained concerned about that.

“I am conscious that in the next quarter’s consumer price information, we will have the next round of rates increases reflected. That will certainly be an upward pressure.”

The Government’s view was that councils hadn’t been focused on the basics “which is why we are passing legislation to require them to do so, and we are exploring rates caps”, she said.

“We think that capping rates could make sense but how we do that is important, because we do want to see councils continue to invest in new housing developments and restoring their water pipes.”

Willis did not comment directly on whether she thought councils should cut public library opening hours or spending on recreational facilities.

It would be a “council by council consideration” whether it would be appropriate for them to reduce access to some services, she said.

“What I am imploring councils to consider is the impact their financial decision-making has on everyday Kiwis, many of whom are struggling with the cost of living.

Westpac had feared inflation would breach the Reserve Bank’s upper limit by hitting 3.1% next time, but that now appears less likely despite ongoing concerns over councils’ rates bills.

“When I ask Kiwis, ‘what are the things that you think about when you think about the cost of living?’, number one on many lists is their rates bill.”

Labour finance spokesperson Barbara Edmonds said local government was being used as a “scapegoat” for cost-of-living concerns, but the party hadn’t yet considered whether a future Labour government would remove any caps on rates, were they to be imposed by the Government.

“Our local government spokesperson will come up with our position in due course. I have to look at the bigger picture, which is ‘why are rates going up so high?’ and a big part of it is water services,” she said.

Overall, quarterly inflation was just 0.5%, significantly down from the 0.9% spike in the three months to the end of March.

Stats NZ spokesperson Nicola Growden said a 4.9% quarterly rise in electricity prices was “the largest quarterly increase in more than a decade”.

Increases in the price of streaming television services such as Netflix also fed through into the quarterly data.

But Stats NZ reported petrol prices were down 4.8% in the quarter.

Council of Trade Unions economist Craig Renney said it was pleasing inflation had not breached 3%, but it was the drop in the price of petrol that had come to the rescue.

Stats NZ had observed that without the fall in petrol prices, annual inflation would have come in at 3.2%, he noted.

“For a lot of workers, particularly the 48% of workers who saw a pay rise of less than 2% this year and those on the minimum wage who saw a 1.5% increase, this is still doing it very tough.”

People could not easily escape many of the price rises that had happened, such as for household energy costs, dairy products and eggs, he said.