Image source: Phillip Capper
CPI Anticipated to Fall Back into RBNZ’s Target Range
In recent years, inflation in New Zealand has surged well above the RBNZ’s target range of 1% to 3%, peaking at 7.3% in 2022. However, economists from ANZ, BNZ, Westpac, and ASB are now forecasting that annual inflation for the three months ending September 30, 2024, will fall within this target for the first time since March 2021. The upcoming CPI report, due to be released tomorrow, will provide critical insight into inflationary trends, with economists forecasting a significant cooling of inflationary pressures.
ANZ and BNZ predict that the CPI will show a 0.8% quarterly rise, with annual inflation reaching 2.3%. Westpac and ASB offer slightly lower estimates, forecasting a 0.7% quarterly increase and annual inflation of 2.2%. These projections align closely with the RBNZ’s own forecast of 2.3%.
ASB’s senior economist Chris Tennent-Brown noted that inflation could fall below 2% by early 2025, driven by softer economic conditions. “Economic softness and increasing spare capacity highlight the risk of inflation settling well below 2%,” he reported, suggesting that further cuts to the Official Cash Rate (OCR) could be expected.
Significance of the Mid-October CPI Release
The mid-October CPI release is highly anticipated as it could mark a significant shift in New Zealand’s inflation trajectory. The CPI report is published quarterly, and this upcoming release will reflect the state of inflation in the third quarter of 2024, potentially validating recent monetary policy decisions by the RBNZ.
In October, the RBNZ implemented a 50 basis point cut to the OCR, lowering it to 4.75%, following an initial 25 basis point cut in August. These moves were driven by concerns over economic weakness and the belief that inflation was moving toward the 2% midpoint of the RBNZ’s target range. Policymakers have declared that New Zealand is now in a position of “excess capacity,” meaning the economy has room to grow without generating inflationary pressure, largely due to lower import prices and weakening domestic demand.
Factors Behind the Decline in Inflation
Several factors have contributed to the expected decline in inflation. New Zealand’s economy has experienced a slowdown, with negative growth recorded in the second quarter of 2024. The country saw a -0.2% contraction in quarterly GDP, translating into a year-on-year decline of -0.5%. This economic deceleration has reduced inflationary pressures as businesses and consumers cut back on spending.
Moreover, tradable inflation—driven by lower import costs—has played a significant role in the overall disinflationary trend. ANZ economists have pointed out that much of the recent inflation reduction can be attributed to falling prices of imported goods rather than domestic price adjustments. However, non-tradable inflation, which reflects domestic price pressures, remains more persistent, requiring ongoing economic slowdowns to fully stabilise.
Business sentiment has also shifted, with surveys indicating that pricing intentions have dropped to pre-COVID levels. This suggests that companies are less likely to pass on higher costs to consumers, further easing inflationary pressures.
Outlook and Implications for the Economy
Looking ahead, economists expect inflation to continue its downward trend. Mark Smith, senior economist at ASB, has forecast CPI inflation to fall below 2% by early 2025, a scenario that could prompt further monetary easing from the RBNZ. While inflation is converging on the target midpoint, the RBNZ may need to take additional steps to prevent inflation from falling too low, which could stall economic recovery.
The RBNZ’s recent rate cuts have already signalled a shift toward a more accommodative monetary policy stance, and further reductions may be on the horizon. However, there are risks associated with achieving and maintaining low inflation. A continued fall in inflation could lead to deflationary pressures, which would likely increase unemployment and further weaken consumer demand.
Conclusion
The anticipated drop in New Zealand’s CPI into the RBNZ’s target range marks a major milestone in the country’s ongoing efforts to tame inflation. The upcoming CPI report will provide crucial data on how well the RBNZ’s monetary policies are working, and whether additional adjustments will be necessary to maintain price stability while fostering economic recovery.