Inflation. It is a word we’ve heard a lot of in NZ recently.

It is the reason monetary policy remains so tight and why the OCR has not yet come down.

So, why is it taking so long for the tough regulations set by the Reserve Bank to take effect?

Why is inflation so persistent?

Let’s have a look at the answer to this question now and what the predictions are for when we might start to see some relief in mortgage rates.

Why Won’t Inflation Go Down?

It is well known that the Reserve Bank (RBNZ) is being tough with its monetary policy to try and get inflation under control. The RBNZ want inflation to be within the target range of 1-3%. As of the last update, inflation is currently 4%. So, we are still sitting outside the target band.

Inflation is inching down slowly. It reduced by 0.6% between quarter 4 of 2023 and quarter 1 of 2024. But, on the whole, inflation is still being “sticky”. Why is that?

Inflation became so high largely because strong demand outstripped supply. The pandemic and other global events (like war) reduced the world’s ability to produce goods and services and also disrupted global supply chains. That meant prices for goods went up to meet demand in shortened supply, and people were willing to pay, meaning the economy remained strong.

Unemployment was virtually non-existent due to low migration throughout the pandemic. When the borders reopened, many people chose to leave NZ, further reducing the pool of workers. The appetite for businesses to pass their rising costs onto consumers has been high, and people began to expect price increases, fuelling further inflation.

That is why the RBNZ have had to take a hard line with the OCR, to restrict the economy and stop the price increases, thereby putting a stop to inflation.

Of course, these policies take time to have an effect on the economy, hence persistent or sticky inflation. As we’ve mentioned previously, there can be an 18-month lag between measures being announced and the effects being felt. That’s why it is taking so long for inflation to go down.

When Can We Expect A Change?

There are signs that we are winning the war on inflation. With budgets tight and the cost of living threatening many families, businesses know they cannot keep passing costs onto their customers. So, they will seek to make savings in other areas. Often, this causes unemployment rates to rise.

Fuel costs are also starting to drop. This is positive for the entire nation as everyone has somewhere to be and the cost for getting there will be lower. Shipping and transport costs will also be less of a burden on businesses and consumers. Many supply chains have recovered after the pandemic and national weather events, increasing the availability of vital goods. All of this adds up to reduced demand and inflationary pressure.

But, when will we see the change?

The latest inflation figures will be released on July 17. This will be a key indicator of when we can expect relief from the RBNZ. These figures will tell the story of whether the restrictive measures are really working.

It feels like inflation figures should be tracking down as in recent weeks the economy has become quite flat – spending has lessened and there are signs that the job market is tightening. If that is the case and inflation figures have gone down, the RBNZ will have more confidence to begin lowering the OCR, resulting in interest rates finally dropping.

What Are Economists Predicting?

We’ve heard every possibility being suggested in the first half of 2024. There has been talk that the OCR will go up, that it will come down, or that it will remain unchanged for the rest of the year.

The RBNZ are still sticking to their plan that we won’t see an OCR cut until August 2025. But the major banks are suggesting otherwise. In fact, BNZ econimists are of the opinion that interest rate cuts need to start as soon as inflation is under control.

Opinions of the major banks have ranged on when we should expect the first OCR cuts to happen. Initially they were all predicting February 2025, but in the last few weeks opinion has shifted.

“All the major banks are now pencilling in an OCR move down in November this year. The BNZ says the markets have priced in a 45% chance of an October cut and are absolutely convinced it will have happened by November.” [source]

While this is an exciting prospect, we need to keep in mind that this is still a prediction and not a certainty at this stage. As always, we would 100% recommend that you seek the advice of an experienced financial advisor, like the team here at Mortgage Suite, before making any decisions in regards to mortgages.

We’d welcome the opportunity to help you make the best decision for your situation. So, reach out to us for an obligation free chat about your mortgage or borrowing plans.