Banks pull forward rate cut predictions as inflation falls to 3.3%

Banks are now predicting a cut in the official interest rate as early as August following today's drop in inflation.

The projections come as the annual rate of inflation has fallen to its lowest level in three years, with Stats NZ figures showing a 3.3% rise in the Consumer Price Index (CPI) in 12 months to the June quarter.

ANZ had previously estimated interest rate cuts would start from February next year. But in a research note released today, it said: "We have brought forward our forecast timing of the first 25bp [basis point] cut in the Official Cash Rate (OCR) to November, rather than in February."

It said the fall was more likely to come earlier than later and that it then saw a series of cuts to follow, all the way down as far as 3.5%.

And ASB went further, saying: "The remaining OCR decisions over 2024 are effectively 'live' and cuts could start as soon as next month."

Kiwibank also gave its assessment: "We still think inflation is on track to fall below 3% in the current (September) quarter. And today's progress on core inflation has us growing in confidence that the RBNZ's 2% target will be achieved in 2025. Rate relief is on its way."

The CPI is an annual measure reflecting changes in the price of goods and services.

The announcement has been welcomed by Finance Minister Nicola Willis, while recognising many New Zealanders were still struggling with the cost of living. Acting Prime Minister David Seymour described the Stats NZ figures as "a glimmer of hope".

The 3.3% increase today followed a 4% increase in the 12 months to the March 2024 quarter. Inflation has fallen from a 7.3% peak in June 2022.

Stats NZ consumer prices senior manager Nicola Growden said the rate of increase was similar to three years ago.

The Reserve Bank of New Zealand’s target range for consumer inflation was between 1% and 3%.

Growden said housing and household utilities were the largest contributors to the inflation rate.

"This was due to rising prices for rent, construction of new houses, and rates."

Rents increased 4.8% in the 12 months to the June 2024 quarter while construction of new houses and rates increase by 3.0% and 9.6%, respectively.

The next largest contributor was miscellaneous goods and services, due to rising insurance prices which increased at the highest rate since 2009.

"Insurance prices increased 14% annually to June 2024 – nearly double what we saw 15 years ago in June 2009, which was the previous highest peak in the series," Growden said.

"Increases in dwelling and vehicle insurance premiums largely drove the higher insurance prices."

Finance Minister Nicola Willis said the inflation rate showed "we are turning our economy around and winning the fight against rampant inflation".

"While today’s data will be welcome news for Kiwis, I know many New Zealanders are still struggling with the ongoing cost of living crisis. Our work is not done and the Government are committed to rebuilding our economy so that workers, businesses and families can get ahead."

She said the data confirms the "careful combination" of investment in frontline services and keeping inflation down was the "right" approach to Budget 24.

"Our tax relief package takes effect at the end of this month, allowing Kiwis to keep more of their own money and easing the cost of living even further for low and middle income families."

Acting Prime Minister David Seymour said the announcement was a "glimmer of hope" after three years of "hard-going".

"I think this reflects that the Government's restraint on its own spending is starting to filter through into the economy."

He said he could not tell the Reserve Bank what to do but, "you don't need an economics degree to see people are hurting, inflation is going down fast, and relief is required."