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Inflation A Stubborn Companion

Inflation A Stubborn Companion

Domestic inflation has come in at 5.8 per cent, well above the number RBNZ predicted, writes Kris Pedersen.

By: Kris Pedersen

6 May 2024

A week ago, our Reserve Bank made the only call they were ever going to and kept the Official Cash Rate at 5.5 per cent, where it has been since May last year.

Accompanying it was almost no comment and this, at least in part, would have been that the most important data update in guiding them on what they should do with the cash rate was coming in a week after they had to announce their decision.

On April 17 we received the updated CPI numbers for the March quarter to see how the ongoing battle against inflation is going.

The initial headline number of 4 per cent was promising, but what would have been extremely disconcerting for Governor Adrian Orr and the rest of the central bank was that domestic inflation (otherwise known as non-tradeable inflation) came in at 5.8 per cent and well above the 5.3 per cent RBNZ predicted back in February.

Delayed Cut

I’d been quietly confident that we would see the first cut to the OCR later this year and had hoped that if we had received positive news through this CPI update and the following one in July that we may have even seen the rate cut as early as August.

It now seems a reasonable chance that the next cut may not come until next year, although I note the economy is in increasingly poor shape and with $200 billion of mortgages that need refixing over the following 12 months and the unemployment rate likely to take a sizeable jump, the end of the year is still a long way away.

As we have seen over the preceding six months, forecasts are often proved wrong.

The driver of local inflation has been mixed but dominated by rents, which were up 4.7 per cent to March, and construction costs and rates which increased 3.35 per cent and 9.8 per cent over the same period.

Rents Take Off

Rents are currently increasing at the fastest pace since data collection started in 1999, and is no doubt partially caused by landlords trying to recoup some cashflow on the back of not just interest rate hikes, but also being hit in the pocket with interest deductibility rules over the last 12 months.

While the decision around fixing needs to take into consideration the borrowers’ individual circumstances, in many cases I am still in favour of the six-month rate, although some may wish to take more certainty on the back of the April 17 news and look to either fix for 12 months or split debt between the two terms.