New Zealand inflation accelerates more than expected to 2.5%
While the economy is growing modestly after a sharp slump that saw gross domestic product contract 2.1 per cent in the six months to September 2024, confidence and investment remain weak
[WELLINGTON] New Zealand’s annual inflation accelerated for the first time in almost three years, while still remaining within the Reserve Bank of New Zealand’s (RBNZ) target band, suggesting policymakers can press ahead with further easing to support the economy.
The consumers price index (CPI) rose 2.5 per cent in the first quarter from a year earlier, quickening from 2.2 per cent three months prior, government data showed on Thursday (Apr 17). The RBNZ and economists’ expectation was for a 2.4 per cent gain. Consumer prices advanced 0.9 per cent from the fourth quarter, also exceeding estimates.
While inflation is edging away from the midpoint of the RBNZ’s 1 to 3 per cent target, the central bank has scope to keep cutting interest rates as the economy struggles to recover from a deep recession. A volatile and rapidly evolving barrage of US tariffs is further clouding the global outlook, prompting several economists to predict the Official Cash Rate (OCR) will drop below 3 per cent this year from 3.5 per cent at present.
“New Zealand’s fragile economic recovery is starting to look a little less assured,” said Miles Workman, senior economist at ANZ Bank in Wellington. “To ensure the recovery remains on track and CPI inflation does not undershoot target in the medium term, a little monetary stimulus will be required.”
ANZ forecast that RBNZ will cut the cash rate to 2.5 per cent by October. It previously expected a trough of 3 per cent, which is the so-called neutral rate that neither cools nor stimulates the economy.
New Zealand’s dollar was little changed after Thursday’s data, buying 59.36 US cents at 11.56 am in Wellington. The yield on policy-sensitive two-year government bonds rose to 3.24 per cent from 3.22 per cent before the release.
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Inflation accelerated for the first time since the second quarter of 2022 when it reached a 32-year high of 7.3 per cent.
The RBNZ began lowering the OCR in August last year and has since been one of the world’s most aggressive cutters, with a cumulative 200 basis points of reductions.
While the economy is growing modestly after a sharp slump that saw gross domestic product contract 2.1 per cent in the six months to September 2024, confidence and investment remain weak. Last week, the central bank said it expected higher US tariffs and uncertainty about the global trade environment to deliver weaker-than-expected economic growth, giving policymakers scope to reduce rates further if necessary.
Money markets are pricing the OCR will fall below 2.75 per cent by the end of the year. Four of five local banks predict the benchmark will drop under 3 per cent.
Key to the rate outlook is the pace of moderation in core inflation. Annual non-tradables inflation, a closely watched indicator of domestic price pressures, slowed to 4 per cent in the first quarter from 4.5 per cent in the prior period, today’s report showed. The RBNZ tipped 3.8 per cent in its February projections.
Rents and local government land taxes were the largest contributors to the annual inflation rate, the statistics agency said.
Imported or so-called tradables prices rose 0.3 per cent from a year earlier.
Other details
- Non-tradables prices increased 1.1 per cent in the quarter; economists expected a 0.8 per cent gain.
- Tradables prices rose 0.8 per cent in the quarter, matching estimates.
- Core inflation excluding food, energy and fuel was 2.6 per cent, slowing from 3 per cent in the fourth quarter. BLOOMBERG
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