- NZ inflation to cool
- Allowing RBNZ to keep cutting
- Barclays says RBNZ to cut below neutral
- Cuts = NZD weakness
Countdown super market in Queenstown, New Zealand. Image © Adobe Stock.
A monitor of New Zealand inflationary pressures shows inflation continues to cool, allowing the Reserve Bank of New Zealand (RBNZ) to cut interest rates further.
Goldman Sachs says its monitor of inflation in New Zealand points to a pickup in inflation in April.
"That said, most of the increase reflects volatility in food and airfares, with rents inflation continuing to ease. Measures of wage growth have also continued to ease," says William Nixon, an economist at Goldman Sachs.
The RBNZ will, therefore, likely look through any temporary pressures and keep an eye on the 'core' elements of New Zealand's price dynamics.
Easing core inflationary pressures will keep the door open to more RBNZ cuts, which the currency textbook says will weigh on the New Zealand Dollar, particularly against currencies belonging to central banks that are more hesitant.
"We think the economic backdrop means risks are tilted toward the RBNZ's cutting below the midpoint of this range and possibly into accommodative territory, which would be a drag on the NZD," says a regularly weekly currency research note from Barclays.
Goldman Sachs estimates monthly prices increased 1.0% m/m in New Zealand in April, taking the annual inflation rate to 2.5% y/y.
That said, the acceleration was driven by volatile prices for food (+0.8% m/m) and international airfares (+24.8% m/m).
More relevant to the RBNZ, growth in rents slowed to 0.2% m/m, and the NZIER measure of selling prices fell to its lowest level since 2021 during the first quarter. Measures of longer-term inflation expectations have been stable around 2%.
Above: GBP/NZD at daily intervals, showing the intact uptrend (i.e. NZD weakness).
Also, measures of sequential wage growth - a key driver of core inflation - have continued to ease.
The RBNZ meets again on May 28, and the market is fully priced for a 25 basis point cut, judging that the central bank wants to stimulate economic growth.
"New Zealand is still feeling the negative effects on demand from a more restrictive monetary policy. The RBNZ policy rate is now at the top of its neutral range of 2.5-3.5%, with a bias towards more easing," says Barclays.
"We think the economic backdrop means risks are tilted toward the RBNZ's cutting below the midpoint of this range and possibly into accommodative territory, which would be a drag on the NZD," the bank adds.
The market expects another rate cut by August, taking the base rate to 3.0%.
Guidance on what happens beyond here will be important, with any suggestion that the cutting can continue likely to prove a headwind to the Kiwi Dollar.