Economists predict a cash rate cut despite rising prices.
In a surprising turn of events, economists are forecasting a potential cut in the Official Cash Rate (OCR), even as they acknowledge the recent surge in food prices. With annual food prices soaring by 4.7% in October, as revealed by Statistics New Zealand's Selected Price Indexes (SPI), one might expect a different narrative. But here's the catch: economists believe there are 'no obstacles' to an OCR cut, and they have compelling reasons for this bold prediction.
The SPI data shows that the annual food price increase was primarily driven by a 4.9% rise in grocery prices, followed by a 7.69% jump in meat, poultry, and fish prices. Despite these increases, economists remain confident that annual inflation will settle around 2.8% by the end of the year. This optimism is based on the expectation that the OCR will be cut, which could have a significant impact on the economy.
The Reserve Bank of New Zealand (RBNZ) has a mandate to keep inflation between 1% and 3%, with a specific target of 2%. Currently, annual inflation, as measured by the Consumers Price Index (CPI), stands at 3%, which is on the higher side of the target. However, the RBNZ's Monetary Policy Committee anticipated this scenario. Economists believe that the initial expectation of this inflation figure, coupled with the forecast of a slowdown in inflation next year, supports their prediction of a 25-basis-point drop in the OCR.
ASB senior economist Mark Smith explains that the stronger-than-expected food prices in October's SPI are not a cause for concern. He attributes these price increases to rising costs, soaring energy prices, and global factors rather than domestically-generated inflation. Smith predicts that annual inflation will end the year at 2.8% and expects it to move towards the 2% target in the following year, primarily due to the large margin of spare capacity acting as a disinflationary force.
Westpac NZ senior economist Satish Ranchhod echoes this sentiment, stating that the new SPI data does not present any barriers to another RBNZ rate cut. Ranchhod's forecast for December quarter inflation is +0.3%, with an annual inflation rate of +2.8% for the year, slightly lower than previous estimates.
While food prices have been a significant focus, other areas have experienced price fluctuations. Statistics NZ's Nicola Growden highlights the increase in the prices of milk, eggs, and coffee. Milk prices have risen by 91 cents per 2 liters over two years, while eggs and coffee have seen increases of 8.8% and 12.4%, respectively, over the same period. These changes may be noticeable to consumers, especially those who enjoy a morning coffee and eggs.
Monthly food prices, however, saw a slight decrease of 0.3% in October compared to September, with fruits and vegetables being the only group to record a fall. Vegetable prices, in particular, experienced a significant drop of 10.7%, making this the largest monthly price decrease since November 2021. Growden notes that while fruit and vegetable prices have generally fallen, certain fruits like kiwifruit and apples have seen substantial increases.
In contrast, electricity and gas prices have been on a consistent upward trend, with 11 consecutive months of price increases. Electricity prices rose by 11.8%, and gas prices by 14.4% in the year to October. Monthly prices also increased, with electricity up by 0.5% and gas by 1.9% in October.
Rent prices, transport costs, and accommodation expenses have also been in flux. The stock measure of rental property increased by 1.6% in the 12 months to October. Petrol prices rose by 2.6% annually, and diesel saw a significant 5.1% jump. Interestingly, domestic air transport costs decreased by 11% annually, while international air transport costs increased by 0.7%. Domestic accommodation prices dropped by 1.1%, but international accommodation prices rose by 4.4%.
And this is where it gets controversial: while economists predict a potential OCR cut, they also acknowledge the risk of the OCR moving lower if the RBNZ intervenes to support the economy. This scenario depends on containing inflationary pressures, which could be a challenging task given the current economic climate. So, will the OCR cut materialize, and what impact will it have on the economy? The coming months will be crucial in determining the outcome, and it's a topic that's sure to spark lively discussions among economists and the public alike.
