Liam Dann: What the inflation fall means for interest rates

Homeowners and businesses hoping we might get a dramatic 75-basis-point (bps) cut to the Official Cash Rate (OCR) in November can take some heart from today’s Consumers Price Index (CPI) inflation data.

The fall in the annual CPI inflation rate to 2.2% – its lowest level since March 2021 – was a touch weaker than the market consensus.

Imported (or tradeable) inflation fell 1.6% for the year, led by falls in the price of vegetables (down 18%) and petrol (down 8%).

Domestic (non-tradeable) inflation remained elevated by rises in council rates (up 12.2%), and rents (up 4.5%).

But at 4.9%, non-tradeable inflation landed lower than many economists expected.

That prompted markets to fully price in a 50bps cut and put 40% odds on a 75bps cut. The Kiwi dollar fell by about 0.2%.

“The Reserve Bank of New Zealand [RBNZ] should be overjoyed with today’s inflation out-turn,” said BNZ head of research Stephen Toplis. “One can never claim that inflation is dead and buried but, for the time being, it’s as near as damn it.”

Toplis said he could understand the logic of a 75bps cut in November, but wasn’t convinced it was likely.

“The rationale is that the economy is weaker than anticipated, inflation is lower and so the Reserve Bank must get its cash rate to neutral quickly,” he said.

But for the RBNZ to go with 75bps in November, a “much bigger negative shock would yet be required”.

ANZ senior economist Miles Workman agreed.

“The marginally weaker tone across the suite of core inflation measures could see talk of a 75bps cut gain some momentum,” he said. “But for the RBNZ to consider that, we’d likely need to see a much weaker [third-quarter] labour market read than expected.”

Unemployment and wage data is due out on November 6.

Workman said non-tradeable inflation was still too high to be called “consistent with headline inflation running sustainably at 2%”.

But he warned the the lag effect of monetary policy meant the RBNZ risked “causing unnecessary pain” if it waited to withdraw monetary restrictions.

“Monetary policy has to be forward-looking, and looking forward, there’s more downward pressure on domestic inflation to come,” he said.

“While there are plenty of structural reasons to think parts of the CPI basket (eg council rates, insurance, electricity) may run hotter than their historical pace over coming years (eg weather-related risk and infrastructure), there is also plenty of evidence to suggest the RBNZ has engineered enough spare economic capacity to tame inflation in a cyclical sense.”

In fact, there were some indicators suggesting the RBNZ had been “a little slow to cut the OCR”, he said.

That increased the risk they’d have to take monetary conditions into stimulatory conditions for a time, he said

Abhijit Surya, Australia and New Zealand economist at Capital Economics in Singapore – who raised the prospect of a 75bps cut last week – saw the odds growing.

“The weaker-than-expected Q3 CPI data reinforce our conviction that the RBNZ will loosen policy more aggressively than most are anticipating,” he said.

The data almost guaranteed the RBNZ would deliver another 50bps cut at its meeting on November 27, Surya said.

“After all, the bank described its policy stance as ‘still restrictive’ in its meeting last week,” he said. “If anything, there is now a higher risk that the RBNZ instead opts for an even larger 75bps cut.”

ANZ senior economist Miles Workman.

Regardless, the CPI data had bolstered his previous forecast that the RBNZ would eventually cut rates to 2.25%, below the 3% terminal rate the market expected.

There were a multitude of policy and cost-induced changes that had contributed to outsized movements and muddied the figures, ASB senior economist Mark Smith noted.

For example, Stats NZ adjusted the CPI to reflect the FamilyBoost early childhood education (ECE) rebate scheme, which began on July 1, 2024.

The one-off impact of the FamilyBoost rebate saw the early childhood education category fall 22.8% (q/q).

ANZ’s Workman noted had this not occurred, annual non-tradeable inflation would have come in at 5.2%.

But underlying pricing pressures did look to be easing, said ASB’s Smith.

“We expect annual CPI inflation to hover around 2% in future, potentially falling below 2% within the next 12 months,” he said.

“The largest regret is that the RBNZ proves to be too slow in monetary policy-easing that could cause economic scarring and sizeable job losses.”

Given the RBNZ’s long-stated policy strategy of following “the path of least regrets”, that suggests more aggressive rate cuts are on the way.

ASB still expects a 50bps cut in November (taking the rate to 4.25%) and sees a 3.25% OCR endpoint.

“But risks are tilted to more front-loaded policy easing,” Smith said.

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.