Q2 inflation climbs to 2.7%, but misses forecast expectations
New Zealand’s annual consumer inflation accelerated to 2.7% in the second quarter, the highest in a year, according to Statistics New Zealand. The increase, however, was slightly below the 2.8% forecast by economists. The data prompted markets to raise the odds of an interest rate cut next month as signs of economic weakness persist.
The quarter-on-quarter consumer price index rose 0.5%, slowing from a 0.9% increase in the first quarter. Economists surveyed by Reuters had expected a 0.6% rise. The rise in annual inflation was driven by higher local government taxes and rising rental costs, reflecting localized price pressures even as broader indicators remain muted.
Markets price in higher chances of August rate cut
Following the inflation report, the New Zealand dollar fell 0.3% to $0.5941. Market pricing now suggests a 75% chance that the Reserve Bank of New Zealand (RBNZ) will cut its official cash rate by 25 basis points in August, up from 61% prior to the release.
The RBNZ had projected second-quarter inflation to reach 2.6% and opted to hold rates steady earlier this month due to lingering price pressures. That marked the first pause since the bank began cutting rates in August 2024. In total, the RBNZ has trimmed rates by 225 basis points to the current 3.25%.
Weaker economy, global uncertainty shape monetary outlook
Economists argue that despite the near-term uptick in inflation, the central bank is likely to maintain a dovish stance. Medium-term inflation remains under control and significant spare capacity in the domestic economy supports the case for more accommodative policy.
Concerns over the global outlook, including the economic impact of U.S. President Donald Trump’s evolving tariff policies, add further pressure on the RBNZ to maintain support for growth. The central bank’s 1% to 3% inflation target range leaves limited room for maneuver if inflation remains near the upper limit.
Domestic inflation pressures showing signs of easing
Annual non-tradeable inflation — a key measure of domestic price trends — rose 3.7% in the second quarter, its lowest level since mid-2021. This suggests that while inflation is above target, underlying momentum may be slowing.
ASB Bank senior economist Mark Smith noted that the RBNZ is likely to “look through” the recent inflation rise. In a note to clients, Smith said the bank is expected to “press the accelerator” by providing policy support in the face of weakening global conditions and ample economic slack.