New Zealand inflation tipped to slow towards RBNZ’s target band

NEW Zealand inflation probably slowed to its weakest in almost three years in the first quarter as high interest rates weigh on the economy.

The consumer price index rose 4 per cent from a year earlier, slowing from 4.7 per cent to its lowest reading since the second quarter of 2021, according to a Bloomberg survey of 17 economists. Prices gained 0.6 per cent from the previous quarter, the survey shows. Statistics New Zealand will publish the report on Wednesday (Apr 17) in Wellington.

While slowing inflation justifies the central bank’s strategy, the flipside is an economy that was in recession at the end of last year and faces the prospect of little or no growth in 2024. The Reserve Bank of New Zealand (RBNZ) last week kept the Official Cash Rate unchanged at 5.5 per cent for a sixth straight meeting and said the policy must stay restrictive to reduce capacity pressures and get inflation back into the 1 to 3 per cent band it targets.

“It is simply too early to declare victory,” said Miles Workman, senior economist at ANZ Bank New Zealand in Wellington. “The RBNZ simply can’t be confident enough yet that reality won’t get in the way of a good story, with plenty of upside inflation risks still on the table and a starting point that is a long way from the ultimate destination.”

ANZ is among a minority of banks that do not expect the RBNZ to start cutting rates until 2025. The majority expect a pivot to easing in the second half of this year, perhaps as soon as August.

RBNZ policymakers have said they are concerned that core inflation is “sticky”, citing components they have little control over such as local government land taxes, insurance costs and rents. They also worry that a population surge will ignite renewed demand for housing.

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In February, the bank predicted inflation would slow to 3.8 per cent in the first quarter and drop below 3 per cent in the third quarter this year. Last week, it said there was some upside risk to that first-quarter forecast but the economy was broadly evolving as it had expected in February.

Recent data has raised the risk of an extended recession. The manufacturing industry contracted in the first quarter while consumer spending also slumped. A survey of business opinion raised the spectre of a hard landing.

“The last seven days has produced a simply miserable set of data,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “The economy at best is bouncing along the bottom. The only good news is that inflationary pressures continue to diminish.” BLOOMBERG