‘Rate cuts in November’ – Kiwibank economists expect rate cut to keep inflation at bay.

Kiwibank economists say they expect the Reserve Bank (RBNZ) to cut official interest rates in November as the economy continues to slow.

Kiwibank Chief Economist Jarrod Kerr and his team hold firm
Market consensus is that the RBNZ will offer one more 25 basis point hike next month.

But they argue that it is not really needed and could put the economy into an unnecessary recession.

“We are confident that we have seen the peak of inflation at an annual rate of less than 7 percent,” Kerr said in a new report released today.

“We should see the final RBNZ rate hike in May. Not desirable.”

The RBNZ could still have raised the cash rate by 25bps to 5.5%, he said, as he telegraphed in February’s monetary policy statement.

“We continue to call the move too far, and we expect to see a material slowdown in economic activity.”

After the May decision, we expect the next move to be price cuts. And we took the first lead to arrive in November.

By November, we could be in for a mild recession orchestrated by the RBNZ to tackle inflation.

The RBNZ should take some solace in the latest rate of inflation, Kerr said.

Annual inflation eased in the March quarter, from 7.2 percent to 6.7 percent.

“Inflation appears to have peaked earlier than the RBNZ forecast,” Kerr said.

The housing market has also been in retreat.

“Home prices are down 17 percent from their peak, and housing-related inflation is easing.”

The key takeaway from last week’s data is the narrowing of the rate hike, Kerr said.

“Only 63 percent of the measured goods and services basket made a profit, down from a high of 72 percent last quarter.”

The origin of inflation was also changing.

“Half our inflation comes from offshore. That’s half of the relief. Annual business [imported] Inflation has fallen sharply from 8.2 percent to 6.4 percent — and is forecast to drop to 1 percent by the end of the year, he said.

There is a good chance of some import inflation into 2024. Petrol prices are down 8.3% from last year, and we expect further falls in oil prices in 2024 as global demand slows.

Another sign that we are past a peak is the persistence of inflation (which excludes highly volatile commodities such as oil and food).

But it was not all good news.

There were still some hot spots and food price inflation was being felt strongly, with a “surprising” 3.7 percent increase in the quarter alone.

Annual headline inflation (domestic inflation) rose from 6.6 percent to 6.8 percent in 2018. In 1999 Stats NZ said the domestic/import split was a new record high since it began reporting.

“I’d be happy to see a slowdown, but the storm and the rebuilding will dampen expectations of domestic inflation – which will rattle the RBNZ,” Kerr said.

However, it was too early to claim any kind of victory, however.

“There is still a long and bumpy road back to price stability, 2 percent.”