The details beneath the headline inflation figure will hint at how much more the RBNZ is likely to cut the OCR cut by in this loosening cycle.
ANZ economists are among those who believe it’ll stop at 3.5%, while ASB economists believe it’ll take the rate down to 3.25%.
Economists from both banks recognise the sluggish economy has slowed key components of non-tradeable, or largely domestically-driven, inflation.
The labour market is soft, wage inflation has abated, and people basically want to buy less stuff. There is spare capacity in the economy.
Rises in construction costs, rents and other housing costs have slowed substantially. These parts of the basket of goods and services that make up the consumers price index (CPI) are very interest rate sensitive.
The difficulty is, other parts of the basket – like insurance premiums and council rates – are less responsive to OCR changes. Their levels are affected by other factors, like adverse weather events pushing up reinsurance costs, or crumbling water pipes lifting infrastructure costs.
While most general insurance premiums have adjusted to a higher level following Cyclone Gabrielle, increases are still expected to be above the general inflation rate.
This is a factor that is expected to contribute towards annual non-tradeable inflation coming in at 4.5%, according to ASB economists and 4.7%, according to ANZ economists in the December quarter.
Economists believe low levels of imported inflation would have offset this falling, but still above-target, level of domestically-driven inflation.
Both ANZ and ASB economists see annual tradeable inflation coming in at -1.2%, partially due to soft petrol prices in the December quarter.
ANZ senior economist Miles Workman recognised low imported inflation had bought the RBNZ some time, while domestically-driven inflation was high. But that window is closing.
ASB senior economist Mark Smith noted the recent up-tick in oil prices, higher food commodity prices and possible tariffs introduced under a Donald Trump administration in the US as sources of imported inflation.
“Tradeable [imported] inflation is typically short-lived, meaning the RBNZ still needs to see further progress on the non-tradeables front over 2025,” Workman said.
Workman said slow economic growth and feedback from business confidence surveys suggested there was “a considerable degree of spare capacity” in the economy, so the RBNZ would likely see non-tradeable inflation fall as required.
“Looking to the CPI outlook for 2025, it’s fair to say that recent New Zealand dollar weakness and strength in oil prices could see annual headline inflation reaccelerate for a time,” he said.
“For the RBNZ that would become concerning if inflation expectations followed suit. However, it’s very common for tradable inflation to prove more volatile than forecast (given how hard it is to forecast the exchange rate and global commodity prices), and the RBNZ tends to look through the bulk of temporary fluctuations in tradable prices.”
Workman said that working to the RBNZ’s central assumption that the OCR is neutral – neither contractionary nor stimulatory – at around 3%, more imported inflation in 2025 than previously thought is unlikely to take a 50-basis point cut in February off the table.
But if there’s more domestically-driven inflation than expected, the RBNZ would assess how low the OCR goes this year.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
