It is widely expected that the Reserve Bank will cut the official cash rate again in August, which could pull short-term rates down slightly. Photo: RNZ
Inflation pushed up to its highest level in a year in the June quarter - but what is that likely to mean for interest rates?
From the end of 2021, the Reserve Bank steadily hiked the official cash rate to get on top of inflation that peaked at an annual rate of more than 7 percent.
But while the 2.7 percent annual increase recorded in June will be uncomfortable for those paying the higher council rates and rents that helped drive the increase, commentators say it's not likely to mean much for the future track of home loan rates or the official cash rate (OCR).
The lift was in line with Reserve Bank expectations published in May, and less than some economists had forecast and the bank signalled in July.
It is widely expected that the Reserve Bank will cut the official cash rate again in August, by 25 basis points (bps).
That could pull short-term rates down slightly, but longer-term home loan rates tend to be more influenced by international factors.
But what happens after that is less certain.
Some economists expect a further drop is likely.
Miles Workman, senior economist at ANZ, said the data was not a road block for further OCR cuts.
"We continue to pencil in OCR cuts for August, November and February, but today's data suggest the easing we've long been expecting could arrive a little more quickly."
He said the risks were tilting towards further cash rate easing being delivered sooner than the bank's expectation of cuts only at monetary policy statements, rather than the reviews in between.
"We have long been expecting the RBNZ will need to cut the OCR more than they have recently been signalling ... the risk of a follow-up cut in October is now looking higher. Labour market data in early August will be important."
ANZ senior economist Miles Workman. Photo: Supplied
Kiwibank economists argued the official cash rate should still drop to 2.5 percent, to absorb some of the slack in the economy, particularly in the labour market.
"Our best guess, incorporating the damage inflicted through the recession we're still crawling out of, has inflation falling to 1.8 percent next year. If realised, the RBNZ continues to overcook."
Westpac said it was still expecting a 25bps cut in August but it would watch core inflation measures to see how strong the underlying trend in prices was beyond that.
But Gareth Kiernan, chief forecaster at Infometrics, said he expected the Reserve Bank would need to stop at an OCR of 3 percent.
"There were reassuring signs in there that the price pressures are more isolated than broad-based. So there's enough to suggest the bank can ease a bit more, but not massively.
"Sustained weakness in labour market data in a couple of weeks' time, along with other monthly data around job ads, employment, consumer spending, and manufacturing activity would be necessary to push the bank towards further cuts in October and/or November."
ASB economists expect a cut to 3 percent in August, but said there was both upside and downside risk.
"After earlier tapping the monetary policy brakes, the RBNZ is expected to press the accelerator and actively provide policy support. We expect the OCR to be cut by 25bps in August to 3 percent. The inflation outlook is highly uncertain, with both upside and downside risks to this view. Persistently high inflation could see the OCR held at 3.25 percent. However, a more protracted than envisaged mid-2025 downturn in NZ economic activity, a higher NZ unemployment rate (expected to hit at least 5.3 percent in 2025), or a global economic slump could push medium-term NZ inflation lower and see the OCR move below 3 percent."
Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
