New Zealand Inflation Drops

New Zealand Inflation Drops Significantly

Inflation in New Zealand has softened more than expected, according to recent data. Consumer prices increased by 0.4% in the second quarter of 2024, and by 3.3% year-on-year, as reported by Stats NZ. This annual rise is below the 3.6% increase anticipated by the Reserve Bank of New Zealand (RBNZ), which has recently adopted a more dovish stance.

Nicola Growden, Stats NZ’s consumers prices senior manager, noted that inflation levels are now similar to those seen three years ago. With central banks in Canada and Europe cutting interest rates, the RBNZ faces pressure to follow suit to maintain the competitiveness of New Zealand's exporters and its currency.

The RBNZ's current forecast suggests no rate cut before August 2025. However, the recent change in the RBNZ’s language regarding interest rates has led some economists to predict a possible rate cut as early as next month. The bank now expects headline inflation to return to its target range of 1-3% in the latter half of this year.

Housing and household utilities were the largest contributors to the annual inflation rate through June, with rents increasing by 4.8% over the 12-month period. The weakening housing market and declining retail spending, due to high interest rates, are key indicators of the country’s economic struggles.

Abhijit Surya, an economist at Capital Economics, believes that the CPI data confirms inflation will likely return to the RBNZ’s target by the third quarter. In the context of a weak economy and a loosening labor market, there is a growing chance that the RBNZ will ease monetary policy at its August meeting.

UBS analysts have identified second-quarter inflation and unemployment rates as critical factors influencing the timing of a potential rate cut. Ahead of the latest CPI data, UBS forecasted that the RBNZ might lower the official cash rate for the first time in November, depending on upcoming economic indicators.

The RBNZ’s next update on the official cash rate is scheduled for August, with market participants closely watching for any signs of an early rate cut amidst ongoing economic challenges.