Economists say big rate cut still on cards after inflation data

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

• Annual inflation remained at 2.2% for the year to December, slightly above Reserve Bank forecasts.
• Economists suggest a 50-basis-point rate cut in February is still possible despite the figures.
• Non-tradeable inflation slowed to 4.5%, with cooling in housing and services sectors contributing to the moderation.

Annual inflation stayed steady at 2.2% for the year to December.

But despite landing slightly higher than Reserve Bank forecasts, a 50-basis-point Official Cash Rate (OCR) cut in February remains on the table, economists say.

The Reserve Bank (RBNZ) cut the OCR by 50 basis points in August and November last year and is expected to do so again next month.

“Importantly, measures of core inflation (which track the underlying trend in consumer prices) have continued to trend down towards the RBNZ’s target range,“ said Westpac senior economist Satish Ranchhod.

“And domestic inflation (non-tradeables) has also been gradually dropping back.

“Consequently, we don’t think today’s result will have been a big surprise for the RBNZ.”

The downtrend in overall inflation over the past year is in large part due to low level of tradeables inflation, which mainly relates to imported retail goods, he said.

Tradeable prices rose by 0.3% in the December quarter, down 1.1% over the year.

While tradeables inflation was stronger than expected in the December quarter that was mainly because of the large increase in used car prices, Ranchhod said.

The broader trend in imported inflation remained soft, he said.

“However, the downturn in imported inflation looks like it is now coming to an end, especially with oil prices pushing higher and the NZD dropping in recent weeks.”

But more heartening for the RBNZ was a continued fall in non-tradeable inflation.

Annual non-tradeable inflation (largely domestic-driven) slowed 0.4% pts to 4.5%, weaker than the RBNZ’s expectation of 4.7%.

“The RBNZ won’t welcome slightly higher than forecast headline inflation, but a small downside miss on non-tradeable inflation should trump the small upside miss on the tradeable side, meaning a 50bps cut in February remains appropriate,” said ANZ senior economist Miles Workman.

“If anything, today’s release should add to the RBNZ’s confidence that tight monetary conditions have worked to tame underlying inflation, meaning it’s entirely appropriate to return monetary conditions to a more neutral setting.”

Beyond February, however, upside inflation risks and the risk that the neutral OCR is creeping higher will warrant a more cautious approach to the withdrawal of monetary restriction, he said.

A “welcome moderation” in non-tradeable inflation was evident, with the lowest quarterly print since the first quarter of 2021 and with annual non-tradeable inflation at its lowest since the third quarter of 2021, said ASB senior economist Mark Smith.

“The moderation in domestic inflation looks to be generalised, with cooling inflation readings from housing and parts of the services sector,” he said.

While the fourth quarter data didn’t show as many of the policy and cost-induced changes that muddied the third-quarter figures, the impact was still evident in annual inflation readings, he said.

Across the year, higher Government charges had masked the decline in overall and non-tradeable annual inflation.

“We expect annual CPI [Consumers Price Index] inflation to marginally push higher over 2025, ending the year at around 2.5%,” Smith said.

“The key swing variable is for tradeable goods and services prices, which are expected to move from a modestly deflationary impulse over 2024 to a mildly inflationary impact over 2025.”

ASB expects annual non-tradeable inflation to approach 3% by the end of 2025 reflecting as the cooling in services and housing-related inflation continues.

“Cooling non-tradeable inflation increases our confidence CPI inflation will remain well below 3% over 2025, paving the way for additional OCR cuts,” Smith said.

The details

The CPI rose by 0.5% in the December 2024 quarter, compared with the September 2024 quarter.

Prices for international air transport, up 6.6%, were the largest contributor to the quarterly rise.

Almost a quarter of the 0.5% quarterly rise in the CPI was because of international air transport.

Other significant contributors to CPI this quarter were second-hand cars – up 4.7% (19% contribution to the 0.5% rise) and rent – up 0.8% (15% contribution).

Lower prices for vegetables, down 11.5%, helped offset the quarterly rise.

The 2.2% annual increase followed a 2.2% annual increase in the September 2024 quarter.

The largest contributor to the annual inflation rate was rent, up 4.2%, according to Stats NZ figures released today.

Almost a fifth of the 2.2% annual increase in the CPI was because of rent prices.

“Annual rent inflation continues to grow at a consistent rate. Between the December 2023 and 2024 quarters, annual rent inflation ranged between 4.2% and 4.8%,” Stats NZ spokeswoman Nicola Growden said.

Local authority rates and payments increased by 12.2% in the 12 months to the December 2024 quarter (16% contribution to the 2.2% increase).

Cigarettes and tobacco prices also increased, up 7.6% in the 12 months to the December 2024 quarter (11% contribution to the 2.2% increase).

This increase was mainly because of the annual tobacco excise tax increase on January 1, 2024.

Lower petrol prices, down 9.2%, helped offset rising prices. This included the removal of the Auckland regional fuel tax of 10 cents per litre plus GST on June 30, 2024.

“Petrol makes up about 4% of the CPI basket. Its price fall made a significant contribution to the slower increase in the annual inflation rate in December 2024,” Growden said.

Between the December 2023 and December 2024 quarters, the weighted average price of one litre of 91 octane petrol fell by 26c from $2.81 to $2.55.

“If petrol was excluded, the CPI would have increased 2.7% in the 12 months to December 2024.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.