With possible rate cuts in late 2024
New Zealand bank ASB is anticipating a decline in the consumer price index (CPI) at the close of the previous year, but suggests that cuts to interest rates might not occur until at least the second half of 2024.
Stats NZ is set to release the CPI on Wednesday, providing a comprehensive measure of inflation for New Zealand households.
ASB economists project a 0.5% quarterly increase in the headline CPI for the fourth quarter (September to December); but expect annual inflation to decrease to 4.7% from December 2022 to December, marking the lowest rate since early 2021, Newshub reported.
ASB’s forecast is slightly more conservative than that of the Reserve Bank (RBNZ), which predicted a 0.8% quarterly increase and annual inflation reaching 5%.
Mark Smith (pictured above), senior economist at ASB, suggested that decreases in food prices and selected consumer durables are likely to result in a broadly flat quarter for tradable prices.
Monthly food prices saw a 0.1% decline in December compared to November, marking the fourth consecutive monthly decrease. ASB expects annual food price inflation to drop below 3% by mid-2024, providing relief to consumers.
Several factors, including lower prices for petrol, accommodation, tobacco, and alcohol in December, have contributed to the easing of inflation.
“The unwinding of the price premium built up over the COVID period is expected to be the key catalyst heralding the return to sub-3% CPI inflation by the second half of this year,” Smith said.
“However, overall CPI inflation has been above the upper bound of the 1%-3% inflation target band for close to three years now and there is still plenty of uncertainty over the inflation outlook.”
Despite these projections, Smith acknowledged the persistent uncertainty in the inflation outlook. He suggested that RBNZ is likely to maintain restrictive OCR settings until inflation is consistently below the target range of 1%-3%.
“It would take a large deflationary shock for the OCR to move lower before the first half of 2024 and we expect a sequence of gradual OCR cuts to begin from the second half of this year (likely August)," Smith told Newshub.
“If, however, progress in lowering inflation stalls, OCR cuts could be delayed until 2025.”
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
