NZ Economists Trim Inflation Forecasts, Still Expect Rate Hikes

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(Bloomberg) — New Zealand economists have trimmed their inflation forecasts after a report Tuesday that fuel prices and airfares retreated in May even before the impact of potential peace in the Middle East.

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Still, inflation is likely to exceed 4% this year, breaching the Reserve Bank’s 1-3% target and making it likely policymakers will need to raise interest rates as soon as July, most of the economists said.

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Today’s report showed diesel prices fell 11.4% in May following a 95% surge in the two months through April. Gasoline prices dropped 3.8% and domestic airfares fell 11.4%.

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“Recent weeks have seen fuel prices starting to drop back,” said Satish Ranchhod, senior economist at Westpac in Auckland. “Importantly, with an easing in tensions in the Middle East we expect to see a further fall in pump prices over the coming weeks.”

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Westpac now sees annual inflation accelerating to 4.1% in the second quarter from 3.1% in the first quarter. That’s less than its previous projection of 4.4%. Inflation will likely be 4.2% in the third quarter and slow thereafter.

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“The more gradual than expected rise in prices, along with the easing in global tensions, means that the RBNZ has more time up its sleeve to see how the economy and inflation is evolving in response to the Iran war,” said Ranchhod, who expects the central bank will remain on hold in July and will hike in September.

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A majority of economists have tipped the Official Cash Rate to increase by 25 basis points to 2.5% in July and rise further to 2.75% in September. Investors see a 72% likelihood of a July hike, swaps data show.

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ANZ Bank lowered its inflation forecast for the second quarter to 4.1% from 4.4% and signaled that may be the peak. However, it continues to project a July rate rise.

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“While a lower-than-otherwise near-term surge in inflation, alongside recent headlines that the US and Iran have agreed to a Memorandum of Understanding, is certainly welcome, this doesn’t fully unwind the global supply shock, and it is still early days as far as the medium-term inflation outlook is concerned,” said senior economist Miles Workman. “The RBNZ’s top priority is to ensure that the current surge in inflation does not broaden into core inflation over the medium term, and that suggests it remains appropriate to start withdrawing monetary stimulus from July.”

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ASB Bank now sees annual inflation of 4.1% in the second quarter and slowing to 3.6% by the end of 2026.

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“OCR hikes are coming, although softer underlying details and hopes of a retracement in freight and energy costs may encourage the RBNZ to wait for more conclusive signs on the medium-term inflation outlook before pulling the trigger,” senior economist Mark Smith said. 

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ASB expects the tightening cycle to start in July with the cash rate rising to 3.25% by the end of the year.

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“This is not a high conviction call, with risks tilted to a later start to OCR hikes and a more drawn-out hiking cycle,” Smith said.

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