Rate cuts anticipated
With the upcoming March quarter inflation report, Kiwibank is projecting a subtle rise in consumer prices by 0.8%, marking a slight acceleration from the 0.5% increase seen at the end of 2023.
This growth is expected despite the Reserve Bank’s (RBNZ) more optimistic forecast of a 0.3% rise for the same period.
Annual inflation trends
Annually, inflation is predicted to slow down to 4.2% from 4.7%, reaching the lowest level since June 2021. However, “imported inflation will likely print stronger than what the RBNZ expected back in February,” according to Mary Jo Vergara (pictured above), economist at Kiwibank. This factor could diminish the likelihood of the headline rate falling below 4%.
Challenges and adjustments in rate forecasts
The Kiwibank analysis suggested that inflation will continue its downward trend, but with certain risks that could delay anticipated rate cuts.
“Risks to the RBNZ’s forecasts are tilted to the upside, in turn delaying the start-date of rate cuts,” Vergara said.
If inflation rates exceed RBNZ’s expectation of 3.8%, it could lead to adjustments in the timing and expectations for rate cuts, potentially affecting the New Zealand dollar.
Sector-specific observations
The Kiwibank report also highlighted significant deflation in imported goods such as food and transport, with notable decreases in prices for fresh produce and petrol. Notably, imported inflation saw a 0.2% decline last quarter with expectations of further deflation in the upcoming March quarter. Conversely, domestic inflation, which the RBNZ can more directly influence, is anticipated to fall to 5.4% annually, slightly above the RBNZ’s forecast of 5.3%.
Core inflation and policy implications
Looking deeper, core inflation measures – which exclude volatile price movements in food and energy – are expected to provide a clearer picture of the underlying inflation trend.
"Core measures of inflation strip out these volatile price movements in food and energy, and will give us a better account of the underlying trend," Vergara said.
With core inflation “moving in the right direction,” there is cautious optimism that inflation could return to the RBNZ's target range of 1-3% by the third quarter of this year.
Anticipated developments and strategic outlook
As New Zealand navigates through economic uncertainties, the forthcoming inflation data will play a crucial role in shaping monetary policy decisions.
Kiwibank maintains that “inflation is on track to returning to within the RBNZ’s 1-3% target band by the third quarter this year,” with continued moderation expected into 2025.
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