Tony Alexander: Inflation drop better than expected but don’t bet on a 0.75% rate cut

ANALYSIS: Heading into the September quarter inflation release, some people had been getting quite excited with their push for the Reserve Bank to cut the Official Cash Rate 75 basis points at the next meeting on November 27. Were this to happen, it would be an extra positive boost for growth in the economy through 2025 and of course the strength of the upturn now underway in the real estate sector.

So, was the Consumers Price Index outcome enough of a surprise to justify a further acceleration in the pace of policy easing?

The annual rate of inflation dropped to 2.2% from 3.3%, which is within the Reserve Bank’s 1-3% target band and about average for the past three decades. So far, so good.

The 2.2% result is also less than the 2.3% expected by the Reserve Bank so there is no problem there.

But the difference is small and when we look at some of the details there is no reason for believing that NZ inflation risks falling below 1%.

In particular, we need to look at the difference between tradeables and non-tradeables. About 40% of the CPI basket of almost 650 things are traded across the border or have their prices heavily affected by prices overseas. These tradeables prices fell 0.2% in the September quarter and 1.6% for the year. We are importing deflation.

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But the more important measure is non-tradeables for which the quarterly price change on average was a rise of 1.3% following a 0.9% increase in the June quarter and 1.7% rise in the March quarter. This measure of what is happening in New Zealand to the prices of things monetary policy can eventually influence rose 4.9% this past year. This is too high and an easy challenge to those who might say the economy is so munted local inflation has died. It has not and it remains too strong.

Independent economist Tony Alexander: "Barring some fresh horrible news for the local or world economy, we can still reasonably expect another 50 basis point cut in the Official Cash Rate in November." Photo / Fiona Goodall

So, barring some fresh horrible news for the local or world economy, we can still reasonably expect another 50 basis point cut in the Official Cash Rate in November, taking it to 4.25%. After all, in November 2022 the Reserve Bank increased the cash rate by 75 basis points, following the CPI for the September quarter coming in 0.6% higher than it expected. This latest result is only 0.1% lower than included in the most recent Monetary Policy Statement.

But consider this. When the 50 basis point cut happens one imagines people will use the same terminology that was used recently to describe the October 9. Namely, “slashed” and “massive”.

Those words were wrong last week and they will be wrong again late in November. Since the Official Cash Rate was introduced in April 1999, it has been cut 28 times. Two of these cuts reached 150 basis points, but the average cut has been 46 basis points.

Therefore, October’s was only average – not massive.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz