WELLINGTON: New Zealand inflation may have slowed more than the central bank expected in the second quarter, paving the way for it to contemplate interest rate cuts.

The annual inflation rate fell to 3.4% from 4% in the first quarter, according to the median estimate in a Bloomberg survey of economists.

That would be below the Reserve Bank of New Zealand’s (RBNZ) forecast of 3.6% and the slowest in three years.

Statistics New Zealand will release the consumer price index report today.

The RBNZ held the official cash rate (OCR) at 5.5% last week but surprised markets by acknowledging signs of a deepening economic downturn and adding that tight monetary policy may be curbing demand “more strongly than expected”.

The central bank sounded much more confident that inflation will return to its 1% to 3% target band this year, fuelling bets that rate cuts could start within months.

“We are increasingly comfortable that sub-3% inflation will be achieved in the second half of 2024 and that conditions are in place that will sustain 15 to 3% inflation,” said Mark Smith, senior economist at ASB Bank in Auckland.

“A 25-basis-point OCR cut in November is our base case scenario.

“But there’s a risk of RBNZ cuts coming sooner and larger over 2024 than previously thought,” he said.

Investors see a better than 50% chance of a 25-point reduction at the RBNZ’s next policy decision on Aug 14 and are pricing at least two by November, swaps data showed.

There is mounting evidence that the economy contracted in the three months through June, which would mean gross domestic product has fallen in five of the past seven quarters.

The manufacturing sector has been in recession for 16 months, the services sector is contracting at the fastest pace since the pandemic and retail card spending fell for a fifth straight month in June.

A key to unlocking rate cuts will be whether there is a significant easing in domestic price pressures, which have remained elevated due to things like rising rents, insurance costs and local government levies.

The RBNZ expects so-called non-tradable inflation to slow from an annual rate of 5.8% in the first quarter to 5.3% in the second.

A print below that “will likely strengthen the view that we are nearing interest rate cuts,” said Mary Jo Vergara, an economist at Kiwibank in Auckland.

Mike Jones, chief economist at Bank of New Zealand here, said all three remaining RBNZ meetings in 2024 should be regarded as “live”.

“November is our central forecast,” he said.

“But, against a backdrop of collapsing activity indicators, there is a heightened probability that a cut either comes earlier or, if the bank does wait it out until November, it kicks things off with a larger, 50 basis-point cut.”

 - Bloomberg