Inflation fall prompts October rate cut call from ASB economists

Reserve Bank Governor Adrian Orr may cut the OCR sooner than telegraphed now. Photo / Mark Mitchell

After today’s Consumer Price Index inflation data, all of New Zealand‘s major bank economists expect to see the Reserve Bank cut the official cash rate in November.

But ASB went one better late today, changing its forecast to one 25 basis point cut in October and another in November.

That brings it closer into line with financial markets - which have priced in a 50% chance of a cut next month.

Annual inflation fell to 3.3% in the June quarter, Stats NZ’s Consumer Price Index (CPI) data showed.

That was below Reserve Bank (RBNZ) expectations of 3.6% and at the low end of market expectations. For the June quarter, inflation was just 0.4%.

ANZ and Westpac, the last two banks still picking a February cut before today, shifted their outlooks shortly after the CPI data confirmed what many had suspected – that inflation is now coming off sharply.

ASB, which (along with KiwiBank and BNZ) was already tipping a November cut, said the data tilted the risks towards earlier and larger Official Cash Rate (OCR) cuts.

“All remaining OCR decisions over 2024 are effectively ‘live’,” said senior economist Mark Smith.

“The various core inflation measures – including in the RBNZ’s sectoral factor model – fell noticeably,” he said.

These developments gave them confidence that inflation pressures were falling fast enough that the RBNZ won’t need to wait for third quarter inflation data - which lands one week after the Bank’s October review.

There is now a consensus among bank economists expecting inflation will fall into the Reserve Bank’s target band of 1-3% in this current (September) quarter.

“It’s looking increasingly likely that the RBNZ will deliver rate relief by November. But prospects for an even earlier cut are rising,” said KiwiBank senior economist Mary Jo Vergara.

“The core measure, which strips out volatile stuff we don’t want included, fell from 4.1% to 3.4%. It’s not far from the RBNZ’s 1-to-3% target band. Unfortunately, domestically generated inflation remains a little hot, as imported inflation is nice and cooling.”

Tradeable inflation – largely imported goods – remained extremely subdued at just 0.3% for the 12 months, from 1.6% previously. That reflected falls in the price of petrol and fresh fruit and vegetables.

Non-tradeable inflation (domestic-driven price rises) fell from 5.4% – from 5.8% previously.

But while this was cooling slowly, it was “partly reflective of cost-driven influences that monetary policy should seek to look through”, said ASB’s Smith.

Big one-off cost rises for council rates, insurance and electricity costs drove the domestic figure up.

He argued that once these factors were accounted for, inflation may already be in the target band.

“Stripping out some of these cost increases suggests that annual underlying CPI inflation is already well below 3%, and it looks set to continue to cool. We do not expect these higher costs to trigger a resurgence of wage and pricing pressures in the current environment.”

ANZ also noted that, while non-tradeable inflation came in marginally above RBNZ’s and its own forecast of 5.3%, the miss was driven by an unusual 9.9% quarterly increase in the “other private transport services” component.

“Stats NZ has reassessed how it calculates road-user charges and a correction has been made in this quarter following previous under-reporting. This can be treated as volatility and a one-off. Without this, non-tradeable inflation would likely have printed in line with our forecast.”

Commenting on its shift in the forecast to a November cut, ANZ chief economist Sharon Zollner noted that the balance of risks was “tilted towards earlier [October] rather than later”.

ANZ chief economist Sharon Zollner. Photo / Captured by Friday

“October is a possibility we certainly wouldn’t discount,” Zollner said. “The RBNZ prefers to deliver turning points at Monetary Policy Statements [MPS], where a full set of forecasts can provide the justification and set out the path ahead. But setting up a cut in the August MPS could tick that box.”

The other tricky issue with an October cut was that the next CPI inflation release (for the September quarter) doesn’t come out until after the RBNZ review, she said.

“That doesn’t rule out a move, but perhaps raises the hurdle a little.”

Westpac economists also shifted their call to November and offered odds of 30% on an October cut.

“The tone of the RBNZ August Statement, labour market, QSBO and GDP data due in coming months will be key in determining how live October is,” said chief economist Kelly Eckold.

From there, he expected to see an initial 100 points of easing by mid-2025 in 25-basis-point increments.

Economists at Infometrics and NZIER did offer a note of caution. Both groups still see February cuts as most likely.

“Today’s inflation data was good, but at this stage we still expect the Reserve Bank to keep the Official Cash Rate at 5.5% until early 2025. The bank is likely to have lingering concerns about services-based and non-tradeable inflation remaining high,” said Infometrics chief forecaster Gareth Kiernan.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.