The Reserve Bank has welcomed this morning’s data showing inflation has fallen to a three-year low, but dampened suggestions it could trigger a mammoth 0.75 point cut to the Official Cash Rate (OCR) next month.
RBNZ Assistant Governor Karen Silk said the annual inflation rate of 2.2% in the year to September 30 – the lowest since March 2021 – gave the central bank confidence it finally has prices under control.
“I’m tempted to do a little jig. I was so excited this morning when the CPI number came out, and I can tell you the bell was ringing at Level 8, 2 The Terrace, Wellington (RBNZ head office),” Silk told the Citi Australia and New Zealand Investment Conference in Sydney.
The RBNZ began easing the OCR with a 25 basis point cut in August, following up with a 50 basis point reduction earlier this month to 4.75%.
With economic growth still flat, some market watchers, including conference host Citi, have called the base rate to be slashed 75 basis points in November, at the central bank’s final board meeting until February.
A cut of that magnitude has not been seen since the height of the covid-19 pandemic in February 2020 and Silk played down the prospect when asked if it was a possibility.
“We’ve still got a lot of information to absorb between now and then and yes, while we target headline [inflation], it’s about sustainability, holding it back at that level, so we’ll be looking closely at core and non-tradable as well,” she said.
Non-tradable inflation was 4.9% over the reporting period, well above the RBNZ’s 1% to 3% target range.
Even if a 75-basis point cut does not eventuate in November, the central bank is still widely expected to cut the OCR again to some degree.
The RBNZ has faced criticism from some quarters for taking too long to lower rates, but Silk said it was necessary.
“To drive inflation lower over recent years, it’s been necessary for us to tighten our policy settings, which in turn have restricted overall financial conditions.
“This has contributed to a weaking in the level of aggregate demand in the economy, and it’s increased our confidence, particularly over recent months, that consumer price inflation is moving sustainable back to the target mid-point of 2%.”
Finance Minister Nicola Willis said the inflation figures showed the economy is moving in the right direction.
“The era of crushing price rises is now over,” she said. “Kiwis can look forward to mortgage rate reductions and businesses will find it easier to invest and innovate with a lower cost of borrowing.”
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