New Zealand rate cut looms as inflation cools

James Thornhill
02:00pm July 17 2024

Parliament buildings in Wellington, New Zealand. (Getty)

Westpac economists expect the Reserve Bank of New Zealand to cut its official cash rate in November after June quarter inflation cooled at a quicker pace than expected.

They’re now pencilling in a 25 basis point cut in the OCR before year-end, having previously forecast the first cut to come in February 2025.

“The RBNZ indicated an openness to tempering the restrictiveness of conditions in July and the latest CPI data gives them room to act on that strategy,” Kelly Eckhold, Westpac’s New Zealand Chief Economist, says in a note. 

Headline consumer price inflation was 0.4 per cent in the June quarter, below the 0.6 per cent forecast by Westpac and the RBNZ, with the annual pace easing to 3.3 per cent. 

Eckhold now expects annual CPI to reduce below 3 per cent in the third quarter, back inside the RBNZ’s 1-3 per cent target band. 

He sees around a 30 per cent chance the RBNZ cuts at its October policy review, although a November move is seen more likely. 

“Thereafter we expect 25 bp cuts at each of the first three meetings of 2025 (February, April, and May) which will take the OCR to 4.5 per cent by mid-2025.” 

The prospect of lower interest rates will be welcomed by New Zealand households which have been grappling with cost-of-living pressures, as well as high rents and mortgage costs. 

Rents continued to rise in the June quarter and are up close to 5 per cent in the past year. Energy bills and insurance costs also rose, while prices were lower in areas related to travel, such as airfares and accommodation. 

Westpac is forecasting the economy to have contracted by 0.2 per cent in the June quarter, and Eckhold said the RBNZ was likely revising down its near-term view on the prospects for growth given recent weak activity data and a potential upturn in unemployment. 

While the RBNZ will be keeping a close eye on domestic inflation, which remains sticky in some pockets, he notes that there is past precedent for them easing before CPI returns to target.

“These have been episodes where growth was weak and hence there was confidence that inflation would trend significantly lower given time and the usual lags. We think that the RBNZ is close to meeting this threshold now.”

For Kelly’s full note, visit WestpacIQ. 
 

James Thornhill

James Thornhill was appointed as editor of Westpac Wire in May 2022. Prior to joining the bank, he was a business and financial journalist with more than two decades of experience with international newswires. Most recently, he was a resources correspondent for Bloomberg, covering the mining and energy sectors, and previously reported on a broad range of topics from economics and politics to currency and bond markets. Originally from the UK, he’s had stints working in London, New York and Singapore, but is now happily settled in Sydney.

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