MNI INTERVIEW: NZ Inflation Falling, Rate Cut Eyed - Ex RBNZ

Headline and core New Zealand inflation are heading in the right direction, despite printing slightly above the central bank’s most latest forecasts, and should reach the 2% mid-point target over the next 12-18 months, potentially allowing a slight reduction of the 5.5% Official Cash Rate, a former Reserve Bank of New Zealand economist has told MNI.

Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, said the RBNZ will begin questioning its restrictive stance by about August should inflation continue to fall. "I think [the RBNZ] would want to see at least another quarter of data," he added, noting the Bank could choose a slightly less restrictive rate while it monitored the economy rather than switch to an unambiguously dovish stance.

Headline inflation rose in line with expectations over Q1, printing at 4.0% y/y, or 0.6% q/q, down from Q4 2023’s 4.7%, according to data last week from Stats NZ. Non-tradable inflation grew 1.6% q/q, 30 basis points higher then expectations and up 50bp from Q4. The RBNZ wants to see inflation at 3.2% in Q2 and 2.5% by Q4.

Reddell said investors should look through the non-tradables print, arguing the less volatile New Zealand dollar reduced import-price swings and did not accurately reflect domestic conditions. “The exchange rate for the last decade has been pretty stable and in that environment it doesn't make as much sense to try and cherry pick tradable and non-tradable inflation. It makes more sense to look at CPI as a whole and to look at those trend mean measures that are much more conventional.”

Reddell last year called for higher rates due to elevated government spending. (See MNI: Wildcard Data Raises Chances Of RBNZ Nov Hike - Ex Staff) However, the OCR's restrictiveness is beginning to show in the wider economy, he added. “It's not at all implausible that we're going to see new weakness particularly translating into the labour market over the next few months,” he said.

Business confidence is falling after a slight bump higher following the election, he added. “A lot of those gains have been given up now and we seem to be stuck, things aren't going well,” he argued. “Domestic demand is proving very weak and if you do that for long enough, inflation is going to come down sharply.”

He said New Zealand’s past experience with inflation showed non-tradable price rises can fall sharply once it begins to soften. Easing moves by other peer Banks this year, particularly the Bank of England and the Bank of Canada, will also place pressure on the RBNZ to act, he added.

NEUTRAL RATE

The RBNZ last week published a paper updating its nominal neutral rate to about 3.9% and adjusting how it incorporates different time horizons into the estimate. (See chart)

Reddell criticised the bulletin, noting it failed to address issues stemming from the pandemic, which central banks globally are still grappling with.

"We really don't know what's changed relative to where we were in 2019, when we all believed neutral rates had been moving lower. There's one school of thought that says the underlying structural factors are much different now than they were in 2019," he argued, warning against central banks moving back to pre-pandemic thinking on neutral rates. "It's only once inflation starts falling that we really get a sense of what the [neutral] rate actually is."