What do the new findings mean for RBNZ's monetary policy?
New data from ANZ Research shows a significant easing of New Zealand’s inflation in the second quarter of 2024, with the Consumer Price Index (CPI) rising by 0.4% quarter-on-quarter (q/q). The June 2024 Quarter CPI Review report highlighted that this brought annual inflation down to 3.3% year-on-year (y/y), significantly below the Reserve Bank of New Zealand’s May Monetary Policy Statement forecast of 0.6% q/q and 3.6% y/y.
Meanwhile, non-tradable inflation, which reflects domestic price changes, rose by 0.8% q/q (5.3% y/y), aligning with the RBNZ’s projections. ANZ noted this category remains closely watched due to its persistent nature and significant influence on medium-term inflation forecasts. On the other hand, tradable inflation, primarily driven by imported goods, showed a decline of 0.2% q/q (0.6% y/y), well below the RBNZ’s expectations of 0.3% q/q and 1.1% y/y. This was largely attributed to weakness in volatile components such as food, energy, and airfares, as well as signs of reduced domestic demand impacting durable goods prices.
Core inflation measures are also expected to trend lower. The 30% trimmed mean inflation and CPI excluding food, fuel, and energy are both predicted to fall below 4%. However, the weighted median inflation is anticipated to remain above 4%. ANZ highlighted as well that a material undershoot of the RBNZ’s headline inflation forecast could intensify speculation about imminent Official Cash Rate (OCR) cuts. Yet, if the discrepancy is primarily driven by volatile components, it may hold less significance.
Broader economic context
A nuanced perspective emerges when considering the broader economic context, ANZ noted. The RBNZ aims to see inflation sustainably return to the 2% target midpoint. While the Q2 CPI report falls short of the 1%-3% target band, it suggests that this threshold is likely to be crossed in Q3. ANZ noted the return to this band to be influenced by the normalisation of global supply chains post-COVID-19, recovery in food production, and stabilisation of energy markets following disruptions caused by the Russian invasion of Ukraine.
However, weak domestic demand also plays a role, particularly in the goods sector, as businesses encounter resistance to price hikes. ANZ noted the RBNZ has shifted its focus to non-tradable inflation due to its persistent upward trend in recent quarters, which suggests a potential underestimation of spare economic capacity.
The NZIER’s Q2 Quarterly Survey of Business Opinion, along with ANZ’s June Business Outlook survey, both highlight a sharp drop in cost and pricing indicators, signalling a rapid adjustment in wage inflation. ANZ noted this suggests that disinflationary dynamics are gaining momentum. The forthcoming Q2 labour market and GDP data will be crucial in confirming whether these dynamics are translating into measurable CPI outcomes.
Outlook
While the Q2 CPI report alone may not trigger immediate OCR cuts, it reinforces the expectation that a return to the 1%-3% target band is imminent, according to ANZ. Recent weak activity and capacity indicators suggest growing downside risks to medium-term non-tradable inflation. The RBNZ is expected to closely monitor upcoming labour market and GDP data to gauge the sustainability of disinflationary trends before considering policy adjustments. If the trend of weaker inflation continues, OCR cuts could be on the horizon earlier than anticipated, potentially as soon as early 2025.
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