There weren't too many surprises in the new inflation figures out of Statistics NZ, but there’s enough in the data to keep the RBNZ nervous

Inflation is showing signs of slowing down, though not quite meeting the pace desired by the Reserve Bank (RBNZ).

New Zealand's cooling annual consumer price index (CPI) inflation rate dropped to 4% in March, from 4.7% in December, although rents, house construction costs and council rates continued to rise at a pace. 

The RBNZ had forecast inflation to be at 3.8% in the March quarter. 

That’s a dip from the 4.7% Statistics NZ reported for the December quarter, but it’s also a sign that inflation is falling at a slower pace than the central bank wants it to be. 

It also means it’s very unlikely the RBNZ will start cutting interest rates anytime soon as inflation is still a way off of its inflation target rate of 1% to 3%.

The CPI increased just 0.6% in the March quarter, up from 0.5% in the previous period. It’s slightly higher than the central bank’s quarterly inflation forecast of 0.4%.

The price increases in the March CPI – which measures changes in the prices paid by households for goods and services providing insight into inflationary trends in NZ’s economy – were the smallest since June 2021.

The biggest price movers were things like rent, construction and accommodation although alcohol and cigarettes also heavily contributed.

Westpac and Kiwibank economists had cast 4.2% as their expected annual inflation rate, ASB picked 4.1% while ANZ went for 4% and BNZ came lowest at 3.9%.

Of those banks, ANZ was the only one to correctly guess the 4% annual inflation figure.

‘Spook the bank’

BNZ’s head of research Stephen Toplis said there was nothing in Wednesday’s CPI data that should change anyone’s view of the world.

BNZ didn’t think the RBNZ would actually be that surprised by the fresh data even though it was still slightly higher than the central bank had forecast in February.

“What the Bank will be less enamoured with is that services inflation remains elevated at an annual 5.3%,” he said.

“So, while we believe there was nothing in today’s data that might spook the central bank, equally, there was nothing in the data that would have the Bank scurrying to bring forward its rate cut agenda.”

BNZ thinks the RBNZ will start cutting the Official Cash Rate, currently 5.50%, before the end of this year but only when annual inflation is well and truly in the desired 1% to 3% target band.

The RBNZ has predicted that headline inflation will drop below 3% in the September quarter of this year although the data won’t be published until October.

Kiwibank economists Mary Jo Vergara, Jarrod Kerr and Sabrina Delgado said the RBNZ’s target band was now “within arm’s reach” and they now “optimistically” expect a 25 basis point cut come November.

The trio said in their CPI report that the RBNZ “won’t be too cheery” about the stronger than expected non-tradable inflation.

Annual non-tradable or domestically driven inflation was at 5.8% in the March quarter – above the RBNZ’s forecast of 5.3% – because of the higher costs from rent, construction and cigarettes and tobacco.

“It’s a miss, and a miss in the wrong direction. The ripple effects of migration are adding upside pressure, especially when it comes to housing,” they said.

“Solid lifts in rents and insurance remain the leading drivers.”

On the annual tradable or largely imported inflation front, it came to 1.6% in March, much lower than the 3% it was sitting at in the previous quarter.

Nonetheless the rise was driven by higher petrol and international accommodation prices. 

The annual March figure was slightly higher than the RBNZ’s forecast of 1.5% for annual tradable inflation.

Still, at 1.6%, it was a significant drop from the 3% recorded in the previous quarter. Increased petrol and international accommodation costs are key contributors to the ongoing increases. 

The sticky factor

ANZ economists Henry Russell and Miles Workman don’t expect the central bank to cut rates until 2025 and the pair said the March CPI data would be “somewhat concerning” for the RBNZ. 

“Domestic inflation pressures remain acute, particularly concentrated in services sectors. These are the sticky components which are likely to show persistence moving forward and continue to imply a more gradual easing of inflation than the RBNZ have anticipated,” they wrote in a note.

“Stickiness in this data reinforces our view that cuts are not likely until 2025.”

ASB senior economist Kim Mundy is also in the 2025 camp when it comes to rate cuts as November this year now looks “too early for the RBNZ to have the required level of comfort it needs to have on the inflation forecast."

“As a result, we now think that the RBNZ will not begin to ease monetary policy until February 2025,” she said.

Westpac senior economist  Satish Ranchhod thinks rate cuts won’t be on the horizon until later next year.

“Inflation is dropping back, and it’s set to fall within the RBNZ’s 1% to 3% target band by the end of this year. But we’re still a long way from the 2% midpoint – we don’t think that will be reached until late 2025 at the earliest,” he said.

Due to the stickiness of NZ’s domestic inflation and Westpac’s expectation that inflation is likely to linger above 2% for an extended period, Ranchhod said rate cuts “won’t be on the table in the near term”.

Paul Bloxham, the chief economist at HSBC said despite NZ experiencing a downturn in economic activity, domestic inflationary pressure continues to persist.

“With demand clearly weakening, its seems that weakness in the supply-side of the economy is the key challenge,” he said.

“Our central case is that inflation will fall back into the RBNZ's 1%-3% target band by Q3 2024 and that this will open the door for the RBNZ to deliver its first cut in Q4 2024. However, today's data suggests the risks are tilted towards it taking longer for inflation to get back to target.”