New inflation measure suggests shift in interest rate trajectory
Economists are reassessing their predictions for the final quarter's inflation following the release of fresh pricing data by Stats NZ. The recently introduced Selected Price Indexes (SPI), comprising around 45% of the Consumers Price Index (CPI), revealed unexpected drops in certain prices, particularly in the food and airfare sectors.
The October data has solidified expectations that the Reserve Bank will keep the Official Cash Rate steady at 5.5% during its upcoming review on November 29. However, it has also sparked speculation that this rate may mark the peak of the current interest rate cycle.
Wholesale interest rates are currently reflecting an 80% probability of an Official Cash Rate cut by August of the next year. While major banks like ANZ and Westpac initially anticipated a rise in the OCR during the first review of 2024 in late February, the recent Stats NZ information has prompted some economists to reconsider.
In a review of the new data, Westpac's senior economist, Satish Ranchhod, emphasized that the accelerated decline in headline inflation could raise the bar for any further rate hikes. Ranchhod stated, "We'll be closely monitoring how domestic demand and the labor market evolve to determine the longer-term outlook for the cash rate."
Doug Steel, senior economist at BNZ, acknowledged that while they are not immediately revising down their fourth-quarter inflation forecast, the new Stats NZ information has put their projections on notice. Steel highlighted the risk of annual CPI inflation in Q4 falling below the Reserve Bank of New Zealand's prior forecasts.
This evolving economic landscape supports the belief held by some economists, including those at BNZ, that the Reserve Bank is concluding its hiking cycle. Despite recognizing that monetary policy extends beyond short-term inflation forecasts, analysts stress the importance of understanding the potential starting point and near-term direction for inflation.
As of now, BNZ economists are forecasting a 0.7% inflation rate for the current quarter, with an annual rate of 4.9%. Westpac economists, on the other hand, have revised their December quarter inflation forecast to 0.6%, down from the previous estimate of 0.9%, projecting a 4.8% rise in prices for the year to December.
The shifting economic landscape is prompting a re-evaluation of future interest rate trajectories.