This despite sticky core inflation and high employment
There’s good evidence that the OCR is doing its job in cooling domestic inflation, despite sticky core inflation and record-high employment, according to a Reserve Bank official.
Headline inflation has been falling over the past year, but non-tradable inflation only hit its peak in March at 6.8% and has since then slipped a mere 0.2 percentage points. One of RBNZ’s primary measures of core inflation remained stuck at 5.8% for the past three quarters, while others have dropped.
Karen Silk (pictured above), RBNZ assistant governor, told interest.co.nz that headline inflation was always going to drop faster than core inflation and that the full impact of higher interest rates hadn’t been felt in the real economy yet.
The average mortgage rate has been on a steady rise towards 6%, as an increasing number of households roll onto rates above 7% and will hit that level early next year.
And while core inflation has only just begun its descent, a number of signs indicated that the OCR was working to restore balance in the economy.
“Are we seeing an easing in domestic consumption? Yes,” Silk said. “Are we seeing falling forward orders for business? Yes. Is durable spending coming down? Yes.”
The few loans being made across nearly all sectors was another evidence that the OCR was working.
Demand for residential mortgages dropped 32.9% in the six months ended March and would likely fall a further 25% in the six months after, interest.co.nz reported.
Inflation forecast
The Reserve Bank predicted a lower non-tradable inflation in the next quarter, but only on an annual basis, with the actual quarterly rate to possibly be the second hottest in recent years.
Non-tradable inflation has been forecast to hit 1.7% in September. That figure would be similar to the March quarter and just a little lower than the fiery 2% seen in September last year.
Both headline and tradable inflation were also expected to be elevated, though, mostly driven by higher petrol prices and annual increases to local rates and insurance premiums.
Higher petrol prices could result in tradable inflation seeing its hottest quarter in two decades and even raise the annual rate, from 5.2% in last quarter to 5.8% in September.
That’s not the type of inflation RBNZ is fighting though. The OCR mostly targets domestic, or non-tradable, inflation.
The quarterly figure was expected to remain fairly hot, with the annual number to likely drop to 6.2% from 6.6% the previous quarter. This decline was also due to the spike in prices last September, and that increase will drop out of the 12-month period, and not because inflation will ease during the quarter.
Headline inflation—which is a combination of tradable and non-tradable inflation—may stall at 6% for a second consecutive quarter.
But after September, things are expected to be back on track soon, with RBNZ forecasting annual headline inflation to return within its target range exactly one year later, interest.co.nz reported.
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