‘Rate cuts by November’ - Kiwibank economists expect recession to see off inflation

The Reserve Bank may have to cut the cash rate this year. Photo / NZME

Kiwibank economists say they expect to see the Reserve Bank (RBNZ) cutting the Official Cash Rate by November as the economy heads into recession.

Kiwibank chief economist Jarrod Kerr and his team are sticking to the market consensus that the RBNZ will deliver one more 25 basis point hike next month.

But they argue that it is not actually needed and may push the economy into a bigger than-necessary slump.

“We’re confident we’ve seen the peak in inflation, with the annual rate comfortably below 7 per cent,” Kerr said in a new report today.

“We should see the final RBNZ rate hike in May. Although it’s not needed.”

The RBNZ was still likely to raise the cash rate by 25bps to 5.5 per cent as it had telegraphed in the February Monetary Policy Statement, he said.

“We stick to our call that it is going to be a step too far. And we expect to see a material contraction in economic activity.

“We expect the next move, after May’s decision, will be rate cuts. And we’ve pencilled in the first to be delivered in November.

“By November, we are likely to be in the middle of a mild recession – one organised by the RBNZ in order to tame inflation.”

The RBNZ should take some comfort in the latest inflation print, Kerr said.

The annual inflation rate decelerated over the March quarter, from 7.2 per cent to 6.7 per cent.

“Inflation looked to have peaked well ahead of the RBNZ’s forecast,” Kerr said.

The housing market also remained in retreat.

“House prices have fallen 17 per cent from the peak, and suggest an easing in housing-related inflation is on the way.”

The key takeaway from last week’s data was the reduction in the breadth of price rises, Kerr said.

“Within the basket of goods and services measured, only 63 per cent recorded gains, down from the series-high 72 per cent last quarter.”

The origin of the price rises was also shifting.

“Half of our inflation has come from offshore. And it’s that half that’s providing relief. Annual tradable [imported] inflation has dropped sharply from 8.2 per cent to 6.4 per cent - and we forecast a fall to 1 per cent by year-end,” he said.

Jarrod Kerr, Kiwibank chief economist.

“There’s a good chance of some imported deflation into 2024. Petrol prices have dropped 8.3 per cent over the last year, and we expect to see further falls in oil prices into 2024, as global demand wanes.”

Another indication that we were past the peak was the continued easing of core inflation (which strips out the most volatile goods, like oil and food), he said.

It was not all good news, however.

There were still some hot spots and food price inflation was being felt acutely, with a “whopping” 3.7 per cent gain in the quarter alone.

Annual non-tradable (domestic inflation) accelerated to 6.8 per cent from 6.6 per cent - a new record high since Stats NZ began reporting the domestic/imported split in 1999, he noted.

“It’s pleasing to see tradable decelerating, but the cyclone and following rebuild frustrates the outlook for domestic inflation - which will frustrate the RBNZ,” Kerr said.

It was still too early to be claiming any sort of victory, however, he said.

“There is still a long and bumpy road back to price stability, 2 per cent.”