By David Winning
SYDNEY--Inflation in New Zealand softened by more than expected in the three months through June, raising the prospect that the official cash rate could be cut as soon as next month.
Consumer prices rose by 0.4% in the second quarter of this year, and by 3.3% from the same period a year earlier, Stats NZ said Wednesday. The annual rise was lower than the 3.6% increase expected by the Reserve Bank of New Zealand, which has turned more dovish recently as the South Pacific economy struggles to emerge from a post-pandemic slump.
Inflation in New Zealand is now at levels similar to three years ago, said Nicola Growden, Stats NZ's consumers prices senior manager.
With central banks in Canada and Europe cutting interest rates, New Zealand is at risk of being left behind if it doesn't follow suit with implications for its currency and the competitiveness of its exporters. The RBNZ's current forecast plot for the official cash rate implies that a cut is not likely before August 2025.
Still, the RBNZ notably changed its language when keeping the official cash rate steady at 5.50% this month, prompting some economists to firm up expectations for a cut in November and potentially sooner. The RBNZ is no longer saying interest rates need to remain restrictive for a sustained period, and it now expects headline inflation to return to the 1-3% target range in the second half of this year.
Housing and household utilities were the largest contributors to the annual inflation rate through June, partly reflecting rising rents and the cost of building new houses. Rents rose by 4.8% across the 12-month period.
The RBNZ is due to update the official cash rate in August, a meeting that could be live as other economic indicators flash red. New Zealand's housing market is weakening sharply, with house sales last month tumbling to their lowest level since February 2023. Retail spending shrank for a fifth consecutive month in June as elevated interest rates led households to tighten their purse strings.
Abhijit Surya, Australia and New Zealand economist at Capital Economics, said the CPI data confirm that inflation is all but certain to return to the RBNZ's 1-3% target by the third quarter of this year.
"In the context of an extremely weak economy and a rapidly loosening labor market, there is a growing chance that the Bank will start easing policy at its next meeting in August," Surya said.
In a recent note, UBS named the second-quarter inflation print as one of two big hurdles in the way of an early rate cut. Attention will now turn to the unemployment rate in the three months through June, and UBS said it likely needs to be at least in line with the RBNZ's forecast of 4.6% to convince the central bank to cut in August. Ahead of Wednesday's CPI data, UBS forecast the RBNZ would lower the official cash rate for the first time in November.
Write to David Winning at david.winning@wsj.com
(END) Dow Jones Newswires
07-16-24 2000ET
