New Zealand Inflation Returns to Within Monetary Policy Target as Expectations Fall

Lower Inflation Expectations Reinforce Slowdown

New Zealand's annual consumer price inflation has returned within the Reserve Bank of New Zealand's (RBNZ) Monetary Policy target range of 1-3%, marking a significant milestone in the country's economic recovery.

Key Points:

• Consumer Price Index (CPI) increased by 0.4% in the December 2023 quarter.
• Annual inflation rate fell to 2.2%, within the RBNZ's target range.
• Lower inflation expectations of firms and households are helping reinforce the slowdown in inflation.
• Longer-term inflation expectations remained steady from the previous survey.
• RBNZ has been raising interest rates to curb inflation.

Central Bank's Response:

Reserve Bank Governor Adrian Orr raised the official cash rate (OCR) by 75 basis points to 4.25% in November 2023. He stated that "when inflation is too high, we raise the cash rate so people spend less and save more." Orr has indicated that further rate hikes may be necessary to bring inflation back to the target range.

Factors Contributing to Lower Inflation:

Several factors have contributed to the decline in inflation, including:

• Easing supply chain disruptions
• Falling global commodity prices
• Weak consumer spending due to rising interest rates

Impact on Economy and Households:

Lower inflation is generally seen as a positive sign for the economy as it reduces the cost of living for households and businesses. However, it can also signal a slowdown in economic activity, as higher interest rates can make it more expensive for businesses to borrow and invest.

Conclusion:

New Zealand's inflation rate has returned to within the RBNZ's target range, indicating progress in bringing inflation under control. Lower inflation expectations and the central bank's ongoing rate hikes are key factors contributing to this slowdown. However, the RBNZ has signaled that further rate hikes may be necessary to ensure inflation remains within the target range.