Economists still expect August OCR cut as core inflation holds steady
New Zealand’s annual inflation ticked up to 2.7% in the June quarter, but economists say the rise was modest and supports a potential cash rate cut in August.
OCR outlook steady despite inflation lift
Inflation rose to its highest level in a year in the June quarter – but what does that mean for home loan rates?
Since late 2021, the Reserve Bank of New Zealand (RBNZ) steadily lifted the official cash rate (OCR) to combat inflation that once peaked above 7%. While the 2.7% annual increase recorded in June may be uncomfortable for households facing higher council rates and rents, the latest data is unlikely to derail the current easing outlook, RNZ reported.
The rise was in line with Reserve Bank expectations and below what some economists had forecast.
Westpac’s Satish Ranchhod said Q2 inflation rose 0.5%, slightly softer than expected: “We continue to expect another 25bp cut in August.”
ASB chief economist Nick Tuffley agreed. “We expect a 25bp OCR cut in August with the possibility of a sub-3% OCR by year-end,” he said,
Food and power drive headline inflation
The key contributors to the quarterly CPI rise included:
- Food prices, which rose 1.6%, driven by seasonal produce and higher grocery costs
- Household energy, which jumped 4.7% due to rising transmission and lines charges
- Petrol prices, which fell 5%, helping keep headline inflation in check
“There has also been a large increase in household energy prices,” Ranchhod said.
Housing-related inflation continues to ease
- Rents rose 0.8% in Q2, with annual rental inflation now 3.2% – the lowest since 2021
- New-build prices declined 0.1% for the quarter and are up just 0.8% annually
“That’s the smallest annual increase since 2009,” Ranchhod said, citing weaker construction activity.
Core inflation stable and within target
Despite the rise in headline inflation, underlying measures remain well anchored within the RBNZ’s 1-3% target band:
- Trimmed mean: 2.5%
- Weighted median: 2.2%
- Core inflation (excl. food, fuel, energy): 2.7%
“The longer-term trend in inflation looks better contained,” Ranchhod said.
Kiwibank’s Mary Jo Vergara echoed the sentiment: “Underlying inflation… is what matters most.”
Economists still see more cuts ahead
ANZ’s Miles Workman said the data supports further easing: “We continue to pencil in OCR cuts for August, November, and February.”
Vergara added: “Our best guess has inflation falling to 1.8% next year… and we continue to advocate a stimulatory setting of 2.5%.”
Infometrics’ Gareth Kiernan said the RBNZ may pause at 3%, but that could change if labour market data weakens.
“There were reassuring signs... the price pressures are more isolated than broad-based,” Kiernan said.
What it means for mortgage advisers
The Q2 inflation update reinforces expectations for a 25bp OCR cut in August, which could provide some relief to clients on floating rates or considering refinancing. But with mixed signals in employment and economic data, mortgage brokers should continue guiding clients through a volatile rate environment.
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