Inflation in New Zealand decelerated more sharply than anticipated in the second quarter, marking its slowest pace in three years despite persistent domestic price pressures.
According to Statistics New Zealand’s report released in Wellington on Wednesday, the annual inflation rate dropped to 3.3% from 4% in the previous quarter. Economists had forecast a milder decline to 3.4%, while the Reserve Bank of New Zealand (RBNZ) had projected a slightly higher rate of 3.6%. Consumer prices saw a modest increase of 0.4% from the previous quarter, falling short of economists’ expectations of 0.5%.
Despite the headline inflation slowdown, the report highlighted ongoing resilience in domestic prices such as rents, insurance premiums, and local government charges, which are likely to be a point of concern for the RBNZ. Following the release, the New Zealand dollar strengthened slightly, reflecting reduced expectations among traders that the central bank might immediately cut interest rates at its upcoming policy meeting on August 14.
At midday in Wellington, the kiwi traded at 60.70 US cents, up from 60.50 cents prior to the report. Market sentiment now indicates a 48% probability of a rate cut in August, down marginally from earlier expectations, though market swaps still suggest at least two reductions by November.
Last week, the RBNZ opted to maintain its Official Cash Rate at 5.5%, surprising markets by acknowledging signs of a deepening economic slowdown. The central bank hinted that its current tight monetary policy might be more effectively dampening demand than previously anticipated, while expressing confidence that inflation would return to its targeted range of 1-3% by year-end. These remarks have fueled speculation that interest rate cuts could commence in the coming months.
Annual non-tradables inflation, a critical gauge of domestic price pressures, eased to 5.4% in the second quarter from 5.8% in the first, slightly below the RBNZ’s May forecast of 5.3%.
Shannon Nicoll, associate economist at Moody’s Analytics, commented, “We expect headline inflation to settle within the central bank’s target range this quarter, potentially paving the way for the RBNZ to initiate rate cuts starting in November. However, this scenario hinges on further positive signs emerging from domestic inflation trends.”
Rodrigo Catril, strategist at National Australia Bank, noted that the mixed nature of the inflation report makes predicting an August rate cut a close call. “While headline inflation is nearing the target range, the RBNZ remains committed to its inflation-targeting mandate and may be concerned about the sluggish progress in non-tradables inflation,” he said.
The housing and household utilities sector was the primary driver of annual inflation, primarily due to rising costs associated with rents, new home construction, and local government rates, as per the statistics agency. Insurance premiums also surged by 14% over the year.
“Domestic inflation continues to moderate, albeit at a gradual pace,” remarked Mary Jo Vergara, economist at Kiwibank in Auckland. “Rental inflation remains robust, and service sector inflation remains elevated. However, indications suggest we may be approaching an inflection point as economic conditions deteriorate.”
In contrast, prices of tradable goods, influenced by global commodities and imports, rose by 0.3% year-on-year, significantly lower than the 1.6% increase observed in the first quarter.
