ANZ yesterday forecast the RBNZ will cut the cash rate to 2.5% by October. — Bloomberg
Wellington: New Zealand’s annual inflation accelerated for the first time in almost three years, while still remaining within the Reserve Bank of New Zealand’s (RBNZ) target band, suggesting policymakers can press ahead with further easing to support the economy.
The consumers price index (CPI) rose 2.5% in the first quarter from a year earlier, quickening from 2.2% three months prior, government data showed yesterday.
The RBNZ and economists’ expectation was for a 2.4% gain.
Consumer prices advanced 0.9% from the fourth quarter, also exceeding estimates.
While inflation is edging away from the midpoint of the RBNZ’s 1% to 3% target, the central bank has scope to keep cutting interest rates as the economy struggles to recover from a deep recession.
A volatile and rapidly evolving barrage of US tariffs is further clouding the global outlook, prompting several economists to predict the official cash rate (OCR) will drop below 3% this year from 3.5% at present.
“New Zealand’s fragile economic recovery is starting to look a little less assured,” said Miles Workman, senior economist at ANZ Bank in Wellington. “To ensure the recovery remains on track and CPI inflation doesn’t undershoot target in the medium term, a little monetary stimulus will be required.”
ANZ yesterday forecast the RBNZ will cut the cash rate to 2.5% by October. It previously expected a trough of 3% – which is the so-called neutral rate that neither cools nor stimulates the economy.
New Zealand’s dollar was little changed after yesterday’s data, buying 59.36 US cents at 11:56am in Wellington.
The yield on policy sensitive two-year government bonds rose to 3.24% from 3.22% before the release.
Inflation accelerated for the first time since the second quarter of 2022 when it reached a 32-year high of 7.3%.
The RBNZ began lowering the OCR in August last year and has since been one of the world’s most aggressive cutters, with a cumulative 200 basis points of reductions.
While the economy is growing modestly after a sharp slump that saw gross domestic product contract 2.1% in the six months through September 2024, confidence and investment remain weak.
Last week, the central bank said it expected higher US tariffs and uncertainty about the global trade environment to deliver weaker-than-expected economic growth, giving policymakers scope to reduce rates further if necessary.
Money markets are pricing the OCR will fall below 2.75% by the end of the year. Four of five local banks predict the benchmark will drop under 3%.
Key to the rate outlook is the pace of moderation in core inflation.
Annual non-tradables inflation, a closely watched indicator of domestic price pressures, slowed to 4% in the first quarter from 4.5% in the prior period, yesterday’s report showed. — Bloomberg
