Inflation pressures are easing despite resilience in the New Zealand economy - Quarterly Predictions, March 2024

February 27, 2024

New Zealand Institute of Economic Research (Inc)
Media Release, 27 February 2024

For immediate release

NZIER Quarterly Predictions, March 2024

There are signs of further easing in inflation pressures in the New Zealand economy. This reflects the intended dampening effects higher interest rates are having on demand, as well as an easing in capacity pressures. 

In particular, there has been a remarkable turnaround in labour shortages over the past year. Net migration has recovered strongly with the reopening of international borders, as firms bring in workers from overseas. We explore further the dynamics of immigration on our labour supply and the broader New Zealand economy in our Special Feature this quarter. 

Some risk of inflation remaining stubbornly high 

Firms remain positive about hiring despite concerns about softening demand. The resilience of the labour market has raised concerns about the upside risks to the New Zealand inflation outlook. In particular, the slight pick-up in the unemployment rate suggests there may be less slack in the labour market than initially expected. 

However, to the extent that the labour market tends to lag broader economic activity, we continue to expect a slowing in the New Zealand economy to drive a further easing in inflation pressures. More recent data, such as the RBNZ Survey of Expectations on longer-term inflation expectations and retail sales, are consistent with this view. 

Higher interest rates are also dampening demand globally and, in turn, reducing inflation pressures in the other major economies. We expect this will also help to support the continued easing in inflation here in New Zealand. 

We continue to expect no further OCR increase in this cycle

The key question for the RBNZ is whether this easing in inflation is occurring at a fast enough pace to get annual CPI inflation back to within its 1 to 3 percent inflation target band. Based on the balance of risks, we expect no further OCR increases in this cycle.

Nonetheless, the resilience of the New Zealand economy does point to some risk of inflation persisting above the RBNZ’s inflation target band. We expect a cautious approach from the RBNZ as it assesses the lag effects of the monetary policy tightening it has undertaken to date. With many households facing significantly higher mortgage repayments as their fixed-term mortgage rates come up for repricing, we expect the slowing in demand will drive a further decrease in inflation. We forecast the RBNZ to cut the OCR from mid-2025 once it is confident it has reined in inflation sufficiently to keep it around the 2 percent inflation target mid-point over the coming year.

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members. 

For further information, please contact: 
Christina Leung, Principal Economist & Head of Membership Services, 021 992 985