Inflation easing: What’s next?

Inflation at 3.3%, easing nicely, boosting confidence…where to from here.

With inflation returning to a workable level, we’re on track to ease the OCR and interest rates in the coming months and year.

Since the OCR was dropped to 0.25% in March 2020 as part of a covid economic stimulus package that in turn saw interest rates reduced to record low levels, it worked too well with global supply constraints from recurring lockdowns coupled with huge demand from the cheapest money ever kicking inflation into top gear. Some 17 months later in Aug 21 the Reserve Bank started dialling the OCR back up incrementally with 12 increases in 20 months to hit 5.5% in May 23 where it’s been since, held at restrictive levels while inflation and immigration factors settle back down and of course interest rates mirroring OCR movements with residential mortgage floating rates sitting at about 3% above the OCR.

With inflation peaking at 7.2% in July 22 and a Reserve Bank target range between 1% and 3% with ultimate target of 2%, the latest figures for the June 24 quarter at 3.3% are encouraging to say the least.

While there are factors at play that make up those figures, save for getting bogged down in the detail, its suffice to say we’re heading in the right direction and considering the previous quarter for March was at 4%, getting to 3.3% is a great effort and a precursor to attaining target range of under 3%. Still inflation, just not as much and reflecting the situation globally, we’ve just taken longer to come back down fuelled by massive net migration since we were seen as a safe harbour during covid which is abating again.

Too early to call it just yet as we need to back it up this quarter to end of Sept, but if the results come in favourably as expected then we could well be looking at the first OCR rate cut in the Nov 24 OCR announcement since May 23 being 18 months since the OCR hit 5.5%. Some say it may start to come back sooner perhaps even in Aug but we need to be certain we’ve tamed the inflation tiger in all respects before we start to ease pressure.

Some banks already have a twitchy finger and have tweaked rates down a tad in the last week but the real adjustments are to be made in the coming months through 2025.

So how long will it take and how much will it be by -

Given the OCR announcements are made around every 6 weeks with the next due 14th Aug, then 9th Oct and the final for the year on 27th Nov, if we consider they went up 12 times in 20 months in increments of 0.25 and 0.5% at a time, it stands to reason with inflation under control if the OCR was dialled back by 0.25% every 6 weeks starting from Nov, we could see it drop a whole 2% or more throughout 2025 to the 3.5% or 3.0% range with interest rates following and floating rates settling about 3% above the OCR.

So ultimately we could see interest rates drop a percent and maybe a half by mid 2025 and another percent by the end of 2025 to maybe 2.5% less than they are currently. Given floating rates are currently around 8.64% this could be 6.14% by the end of 2025 and current 18 month fixed rates of around 6.69% could see them at 4.19% by the end of 2025. If they dropped a full 3% the same would see floating rates at around 5.64% and 18 month fixed at around 3.69%. Complete conjecture of course, no one knows exactly how steady or quickly they will drop but if you look at my blog on ‘normalising interest rates’ you’ll see apart from the heady days of the 80’s and a few other events we’ve mostly been residential mortgage rates around 5.5% - 6.5% floating with fixed a couple of percent under that through from the 1960’s with all being well in the world.

So we’re right on target to get the OCR and interest rates back to their terminal levels in due course with pent up expectation that movement will start earlier than anticipated which is great. Not out of the woods yet, cruising through the rest of 2024 with some exciting times and lots to look forward to in 2025 and things finally getting back to normal with confidence and economic growth back on the table, about 5 years since it all went crazy which is about right.

Click the link to the Reserve Bank site on the latest inflation announcement, a short video on ‘what is inflation’ and graphs showing historic inflation and where we sit right now, you’ll see we’ve had it a LOT worse in the past.  www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflation