Imported inflation, sitting at 3%, continues to do most of the leg work in bringing down the headline number. But that’s not really what the RBNZ cares about, says chief economist Jarrod Kerr, Mary Jo Vergara senior economist and Sabrina Delgado economist. “The RBNZ wants to see a significant deceleration in domestic inflation. And with non-tradable inflation remaining elevated at 5.9%, that’ll do little to appease the central bank.”
Although inflation is running well below the RBNZ’s forecasts, it has made it clear it needs to see stable inflation in its rear view mirror, not its projections.
In November, the RBNZ said it wanted to see inflation back at 2% before cutting, but Kerr and his colleagues think it will cut the OCR before then. “That’s the vibe.”
On the domestic inflation front the ripple effects of huge migration is adding upside pressure, especially when it comes to housing, Kerr says. Solid lifts in rents and insurance remain the leading drivers. Rents were up 1.1% over the quarter. Last year, rental inflation crept up to 4.5% - high above the about 3% pre-covid rates.
Although, when housing is excluded, domestic inflation looks to have turned a corner – falling from 7.3% year-on-year, he says.
Kerr says inflation continues to move in the right direction. And despite some hurdles ahead (including a red sea induced spike in shipping costs, and a migrant fuelled rise in rents) he sees inflation continuing to ease back towards 2%.
“We’re on track for inflation hitting the top end of the RBNZ’s target 1-3% target band by the second half of this year. Which means rate cuts are not too far away. Despite the RBNZ ending 2023 with a hawkish message, and signalling another rate hike, the figures should see a softening in the RBNZ’s tone in February.”
Meanwhile Westpac senior economist Satish Ranchhod says with lingering strength in domestic prices and measures of core inflation, the RBNZ can’t take its foot off the brake just yet.
He says Westpac remains comfortable with its view this year will be a year of an unchanged OCR.
“Ongoing sticky core inflation will likely be viewed with caution by the RBNZ and emphasises that there is still work to do before it is sure inflation reaches 2% in the second half of next year as is required by their new more focused mandate.”
Ranchhod says more indications of declining core inflation will likely be required before an adjustment lower in the OCR occurs.
