Introduction to Inflation and Interest Rates
The latest annual inflation rate has come in lower than expected! This news could lead to the Reserve Bank of New Zealand (RBNZ) cutting the Official Cash Rate (OCR) in August, and maybe even again in October.
Current State of the Official Cash Rate
As of July, the OCR is at 3.25%. The RBNZ had been cutting the OCR for six months straight before pausing in July. The RBNZ thinks they can cut the OCR even lower if underlying inflation keeps going down. The next time they’ll review the OCR is on August 20, then again on October 8, and finally on November 26.
What Economists Are Saying
Economists are agreeing that the annual inflation rate is softer than they thought it would be. The senior economist at ANZ, Miles Workman, says, "The easing we’ve long been expecting could arrive a little more quickly." ANZ had already predicted OCR cuts for August, November, and February.
Importance of Labour Market Data
Workman thinks the labour market data coming out on August 6 will be important. The head of research at BNZ, Stephen Toplis, says they were worried a strong CPI might change their expectation for a further rate cut, but it did the opposite. Toplis now expects rate cuts in both August and October.
Prospects for Future Rate Cuts
The New Zealand Institute of Economic Research (NZIER) says the continued easing in non-tradable inflation means the RBNZ can cut the OCR again. They predict one more OCR cut in August, bringing the OCR to 3%. Infometrics chief forecaster Gareth Kiernan expects the OCR to be cut to 3% in August, but doesn’t think there will be scope for further cuts after that.
Experts’ Predictions
Westpac senior economist Satish Ranchhod says the latest result was on the low side of what the RBNZ anticipated. Westpac expects another 25 basis point cut in August. Kiwibank senior economist Mary Jo Vergara says inflation will likely push further, but underlying inflation remains within the RBNZ’s target band. Vergara predicts inflation will slow below the 2% mid-point of the RBNZ’s target band in 2026.
Conclusion
In conclusion, the latest inflation rate has opened up the possibility of the RBNZ cutting the OCR in August and potentially again in October. Economists are predicting rate cuts, with some expecting the OCR to go as low as 2.5%. The RBNZ will be keeping a close eye on labour market data and underlying inflation to make their decision. One thing’s for sure – the next few months will be interesting for the New Zealand economy!
