Challenges ahead

Over the past week, we have seen updates on several key aspects of the economic outlook. Putting these together, we’re continuing to see an environment where inflationary pressures remain very well contained.

The RBNZ continues to face a number of challenges, with inflation set to soften in the near term…

First up, inflation is looking like it will come in on the softer side of the RBNZ’s expectations. We are forecasting a subdued 0.1% rise in the CPI for the June quarter, which would see annual inflation recede from 2.2% to 1.8%. New Zealand’s inflation figures are often thrown around by temporary factors and this year has been no different. There was an unusually large 1% rise in prices over the March quarter, which was led by gains in food and fuel prices. Food and fuel will continue to play an important role in the June quarter figures, though this time their net impact on the inflation rate will be negative.

Our forecast is lower than the 0.3% quarterly increase that the Reserve Bank forecast in its May Monetary Policy Statement. However, a downside surprise on inflation is unlikely to be too much of a concern for the Reserve Bank, which had already concluded that the pickup during the first quarter was on the back of transitory shifts in food and fuel prices and that inflation would be well below 2% again by next year.

Taking out food and fuel prices gives us a clearer picture of where inflation is heading. Under this metric, inflation bottomed out some time in 2015. Since then, it has risen gradually, though it remains below the 2% midpoint of the Reserve Bank’s target band. This is consistent with our view that while the economy is growing at a solid pace, it’s not at risk of overheating.

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