Inflation tipped to fall again, but probably not to below 4%
Stats NZ is expected to report another sizeable drop in inflation on Wednesday but not quite to the level that the Reserve Bank had been hoping for in February.
The inflation figure could help shape banks’ expectations on whether the Reserve Bank will start to cut the official cash rate (OCR) later this year, or hold off on monetary easing until next year, so any surprise could flow through into fixed mortgage rates.
The Reserve Bank forecast in its last monetary policy statement in February that annual inflation would drop to 3.8% in the March quarter, from the 4.7% rate recorded in the final quarter of last year.
But analysts were less optimistic after Stats NZ released partial monthly data on prices on Friday.
ANZ predicted that annual inflation would come in at 4% while ASB senior economist Mark Smith said its preliminary view was that it would land at 4.1% and “with some upside risk”.
Westpac and Kiwibank topped out the bank forecasts, estimating the figure would be 4.2%.
BNZ has been pencilling in 4%, but research head Stephen Toplis said it wouldn’t finalise its call until today.
Toplis believed a near miss on inflation was unlikely to greatly perturb the Reserve Bank, given the trend was “unequivocally down” and it had already reconciled itself to inflation coming in a bit higher than it had been expecting in February.
The Reserve Bank left the OCR at 5.5% on Wednesday, indicating it was continuing to watch and wait for inflation to fall, but seemingly with far fewer worries than late last year.
“They were very clear when they released their monetary policy review that inflation was going to be slightly higher than they had forecast. So they've already said it doesn't matter,” Toplis said.
Westpac chief economist Kelly Eckhold said rental pricing data released by Stats NZ on Friday, which showed rents rising 4.6% over the year, proved there was “still pressure out there”.
“The thing to watch is going to be domestic prices, because that's what we're seeing hold up at pretty firm levels two years after the Reserve Bank began hiking rates.”
Assuming inflation did come in at about 4%, that would suggest households “weren’t moving forwards” given wages had risen by at most that last year, Eckhold said.
He believed the inflation outlook meant the Reserve Bank would hold off cutting interest rates until next year.
Kiwibank senior economist Mary Jo Vergara believed the first rate cut would come in November, after the Reserve Bank had seen the third-quarter inflation figure reported in mid-October.
Retail NZ chief executive Carolyn Young said the wait ahead for rate cuts and a 3% drop in retail spending reported by Stats NZ for the month of March suggested the remainder of the year would be “tough”.
ANZ cautioned that while progress was being made on inflation, there was potential for inflationary pressures to re-emerge globally. That meant the Reserve Bank was likely to remain cautious, it said.