Official cash rate cut remains unlikely, despite drop in inflation

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Annual inflation slowed to 5.6 percent in the three months ended September.
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Inflation looks set to fall well below 5 percent by the end of the year, to its lowest level since mid-2021.

A slew of partial price indices from Stats NZ showed food prices falling 0.2 percent in November on the month before because of cheaper fruit and vegetables, but they were still 6 percent higher than a year ago.

Other selected price indices, which collectively covered about 45 percent of the consumer price index (CPI) – the main inflation measure – showed marked falls in petrol and airfares, offsetting rises in alcohol and tobacco, and rents.

Westpac senior economist Satish Ranchhod lowered his inflation forecast for the final three months of the year to a rise of 0.3 percent, for an annual rate of 4.5 percent, but said the Reserve Bank (RBNZ) would not overreact to the numbers.

“Core inflation – especially for domestic prices – remains elevated. That means inflation is still set to remain far above the RBNZ’s target well into the new year.”

Annual inflation slowed to 5.6 percent in the three months ended September, having peaked at 7.3 percent in the middle of next year.

The RBNZ forecast last month a 0.8 percent rise for the quarter and 5 percent at the end of the year, but said it was still too high and taking too long to get back into its 1-3 percent target zone, prompting a warning that it could raise the official cash rate (OCR) again.

ASB senior economist Mark Smith said the numbers were encouraging, but did not cover some of the services costs, which had been stubbornly high.

“The RBNZ will want to see further concerted progress to prevent hiking the OCR further. We expect this to be the case, but for the RBNZ to keep OCR settings tight to ensure circa 2 percent inflation is delivered. No OCR cuts are expected until 2025.”