VIEW: Westpac Doesn’t See CPI At Band Mid-Point Until Late 2025

While Q1 headline CPI eased to 4.0% y/y from 4.7%, imported inflation is bringing price pressures down. Domestic inflation remained elevated at 5.8% y/y easing only 0.1pp. Westpac notes that this is a lot stronger than the RBNZ assumed in its February forecasts. The fact that non-tradeables inflation is proving so ‘sticky’ two years after tightening began is likely to concern the central bank “and rate cuts won’t be on the table in the near term”.

• “Inflation is dropping back, and it’s set to fall within the RBNZ’s 1% to 3% target band by the end of this year. But we’re still a long way from the 2% midpoint – we don’t think that will be reached until late 2025 at the earliest.”
• “The softness in the March quarter was entirely due to lower tradable prices, with falls for items like used cars and apparel. … That softness reflects the downturn we’re seeing in retail spending, with households dialling back their spending in many areas … We expect spending will remain soft over the year ahead. That softness is a sign that monetary policy is working to restrain demand.”
• “In contrast, domestic inflation was hotter than we or the RBNZ had expected. … Non-tradables inflation has now surprised the RBNZ on the upside for the past four quarters. Upside surprises to our non-tradables forecast were spread across the economy. … Notably, non-tradables excluding construction costs remains elevated at 6.3% and has eased only slightly since the RBNZ first raised the OCR back in 2021.”