Venu Menon
Wellington, July 19,2024
Finance Minister Nicola Willis is buoyed by signs that inflation is slowing.
The latest Stats NZ figures show the annual rate of inflation has dropped from 4% to 3.3%, a three-year low.
But it continues to hover outside the target band of the Reserve Bank of New Zealand (RBNZ).
“Our focus remains on reducing inflation to the Reserve Bank’s target range of 1 to 3%,” Willis notes. As of now, an early cut in interest rates is not in the offing, a point not missed by the finance minister.
“When interest rates also begin to fall, it will give New Zealanders real cost-of-living relief and allow our economy to kick back into gear.”
But for the Reserve Bank to start dropping the Official Cash Rate (OCR), it will need evidence showing that lower inflation is holding steady. Nevertheless, the RBNZ appears to be tilting to the position that inflation pressures are easing in a weakening economy.
The latest inflation figures have left the major banks converging around interest rates dropping in November 2024.
Some economists view the current situation as being favourable to home owners and buyers.
“For people thinking about buying a house, there’s a decent chance over the next two or three months that interest rates will start to come down,” says Kelvin Davidson, chief property economist for CoreLogic, which provides property data and services across New Zealand and Australia. “I wouldn’t be surprised if bank’s rates start to drift down. The market is quiet so banks will want to compete.”
But high rents, council rates and insurance premiums are driving domestic inflation.
Rents increased 4.8% in the 12 months to the June 2024 quarter, while rates rose 9.6%. Insurance premiums rose 14% in the 12 months to the June 2024 quarter, following a 14 % increase in the 12 months to the March 2024 quarter.
“Insurance prices increased 14% annually to June 2024 – nearly double what we saw 15 years ago in June 2009, which was the previous highest peak in the series,” says Nicola Growden, Stats NZ consumer prices senior manager.
Household utilities are a key contributor to the quarterly inflation rate, with energy (which includes electricity and gas) increasing 2.8%.
“Electricity prices tend to increase in June quarters as the nights get longer,” Growden notes, adding: “The 3.0% increase in electricity prices this quarter is the largest quarterly rise in 10 years, but is similar to the June 2023 quarter.”
Tradeable and non-tradeable inflation
Stats NZ identifies rent, insurance, and cigarettes and tobacco as drivers of non-tradeable inflation at 5.4% in the 12 months to the June 2024 quarter (compared with 5.8% in the 12 months to the March 2024 quarter).
Tradeable inflation was 0.35% in the 12 months to the June 2024 quarter (compared with 1.6% in the 12 months to the March 2024 quarter), driven by high prices for petrol, accommodation services, and grocery food.
“This was partly offset by lower prices for fruit and vegetables, and passenger transport services,” according to Stats NZ.
Employment and wages
The RBNZ will be focused on monitoring the trends in employment and wage growth.
The net increase in migration is expected to exert downward pressure on wages, which will help keep inflation under control.
Tax relief package
Finance Minister Willis is talking up the coalition government’s tax relief package which takes effect in July-end.
“Our tax relief package gives average income households up to $102 a fortnight, plus FamilyBoost childcare payments of up to $150 per fortnight for eligible families with young children.”
The minister says the inflation data released by Stats NZ confirms the government’s approach in Budget 2024, reflecting “prudent government spending, lower taxes for hardworking New Zealanders and laying the foundation for New Zealand’s economic recovery.”
Venu Menon is an Indian Newslink reporter based in Wellington
