Don't expect interest rates to be cut any time soon. Photo / 123RF
Don't expect interest rates to be cut any time soon. Photo / 123RF
The headline number is headed in the right direction but don’t expect the Reserve Bank to cut interest rates any time soon.
The annual inflation rate has fallen to 6 per cent for the year to June, from 6.7 per cent in the year to March.
That was marginally betterthan the Reserve Bank forecast of 6.1 per cent, but the Consumers Price Index revealed some other numbers that suggest the battle to rebalance the economy is not won.
Non-tradable inflation came in at 6.6 per cent, stronger than the RBNZ’s forecast of 6.3 per cent.
The upward surprise was broad-based, rather than reflecting unexpected moves in one or two components, ANZ economists noted.
Ready-to-eat food and milk, cheese and eggs increased 9.8 per cent and 13.8 per cent respectively.
But construction costs and rental prices also remained elevated.
Prices for building a new house increased 7.8 per cent in the year to June 2023, following an 11.5 per cent increase in the year to March 2023.
“The RBNZ will take little comfort from the fall in headline inflation today,” ANZ’s Henry Russell said.
“The sharp fall in the annual headline largely reflects sizable base effects rolling out of the equation. The details still show clear underlying persistence.”
With the headline rate still obviously far higher than it’s supposed to be, it’s by no means “job done” for the RBNZ.
“Monetary policy is working to cool inflation pressures, but there’s a long way to go and it’s not clear that progress is fast enough,” he said.
ANZ economists still forecast one more rate hike from the Reserve Bank, in November, taking the Official Cash Rate to 5.75 per cent.
The New Zealand dollar rallied to US63.13c from US62.76c just before the release.
But on debt markets, the two-year swap rate, which influences home mortgage rates, was little changed at 5.345 per cent.
The consensus forecast among major bank economists had been for a quarterly rise of 0.9 per cent, taking us to an annual figure of 5.9 per cent.
In the end, the quarterly figure landed at 1.1 per cent.
“While inflation is ‘lower’, it is not ‘low’ by any stretch of the imagination,” said Westpac senior economist Satish Ranchhod.
“Importantly, measures of core inflation are continuing to run at rates of around 6 per cent and some have actually picked up in the June quarter. That points to lingering strength in underlying price pressures. Similarly, domestic inflation – aka non-tradables inflation – remains elevated at 6.6 per cent.”
Satish Ranchhod, senior economist at Westpac Bank. Photo / NZME
With strong and persistent underlying price pressures, inflation was unlikely to return within the RBNZ’s target band any time soon, he said.
Kiwibank economists were more upbeat, describing the topline numbers as good news.
It was worth remembering that the peak in inflation was a whopping 7.3 per cent one year ago, they said.
Non-tradeable inflation was 6.6 per cent in the year to June, driven by those higher prices for construction, rents and food.
Tradable inflation was 5.2 per cent year-on-year, with higher prices for vegetables and international air transport driving the increase and falling petrol prices partially offsetting the increases.
Non-tradable inflation measures final goods and services not exposed to foreign competition and is an indicator of domestic demand and supply conditions (although foreign competition can influence the inputs of these goods and services).
Tradable inflation measures final goods and services influenced by foreign markets.
“We do like to look at tradables (imported) versus non-tradables (domestic) prices,” said Kiwibank chief economist Jarrod Kerr.
“Half of the inflation we’ve experienced has been imported. And tradables are moving exactly as we had hoped, down to 5.2 per cent from 6.4 per cent, and a peak of 8.7 per cent. Tradables will fall fast from here. But it’s largely outside the RBNZ’s control.”
The RBNZ would have more of a focus on non-tradables inflation, over which it had influence, he said.
Kiwibank doesn’t see any further RBNZ rate hikes as necessary.
“Monetary policy operates with a lag, and we’re yet to see the full impact of past actions on today’s economy,” Kerr said.
“For example, around 40 per cent of all outstanding mortgages roll off their (low) fixed rates, and on to much higher rates, over the next six months. That’s pain. And that’s going to impact discretionary spend. We expect the next move from the RBNZ will be a rate cut. And we’ve pencilled in a move in February.”
- Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
