New Zealand’s inflation outlook has dimmed, potentially prompting the Reserve Bank to consider cutting interest rates as early as August. According to a Bloomberg survey, annual inflation dipped to 3.4% in the second quarter from 4% in the preceding quarter, falling below the Reserve Bank’s forecast of 3.6% and marking a three-year low. Statistics New Zealand is set to release the Consumers Price Index report on Wednesday at 10:45 a.m. in Wellington.
Despite maintaining the Official Cash Rate at 5.5% last week, the RBNZ indicated concerns about a deepening economic downturn, suggesting that current monetary policies might be curbing demand more than anticipated. The central bank expressed confidence in inflation returning to its 1-3% target band this year, prompting speculation that rate cuts could commence within months.
Mark Smith, senior economist at ASB Bank in Auckland, noted, “We are increasingly comfortable that sub-3% inflation will be achieved in the second half of 2024 and that conditions are in place that will sustain 1-3% inflation.” He added, “A 25 basis-point OCR cut in November is our base case scenario,” but acknowledged the possibility of earlier and more substantial cuts by the RBNZ throughout 2024.
Investors are pricing in a likelihood exceeding 50% of a 25-point reduction at the RBNZ’s upcoming policy decision on August 14, with expectations of at least two cuts by November, according to swaps data.
The New Zealand economy shows signs of contraction, with indications that GDP may have declined in the second quarter after five out of the last seven quarters showed a downturn. The manufacturing sector has been in recession for 16 months, the services sector is contracting rapidly, and retail card spending decreased for the fifth consecutive month in June.
The path to rate cuts hinges on whether domestic price pressures ease significantly, which have remained elevated due to factors like rising rents, insurance costs, and local government levies.
Mary Jo Vergara, economist at Kiwibank in Auckland, remarked, “A print below that [5.3% non-tradable inflation] will likely strengthen the view that we are nearing interest-rate cuts.”
Mike Jones, chief economist at Bank of New Zealand in Wellington, emphasized that all remaining RBNZ meetings in 2024 should be considered as potential opportunities for rate adjustments. “November is our central forecast,” he stated. “However, given the backdrop of declining activity indicators, there is an increased probability of an earlier cut or, if the Bank waits until November, a larger 50 basis-point cut to kick things off.”
