BNZ head of research Stephen Toplis says the current inflationary noise 'will intensify the RBNZ’s headache'

BNZ economists are now forecasting that inflation will break out of the 1% to 3% target range later this year, with a 3.1% annual gain forecast by the September quarter.

And BNZ's head of research Stephen Toplis says the current inflationary noise "will intensify the RBNZ’s headache".

Toplis's comments followed release on Tuesday of Selected Price Indexes (SPI) figures showing food prices rose 4.4% in the 12 months to May. The RBNZ next meets to review the Official Cash Rate, currently at 3.25%, on July 9.

"...The chances of the RBNZ holding fast at the July meeting have just taken a leap forward in light of today’s data and the evolving global environment," Toplis said.

He said the May month SPI figures "are unequivocally hawkish".

"On balance the monthly data has turned out to be more inflationary than we had expected. This has caused us to revise upwards our Q2 CPI [Consumers Price Index] pick to 0.8%, from 0.6% previously. Importantly, this is well above the RBNZ’s 0.5% estimate for the quarter."

Toplis said what bothered the BNZ economists most were the jumps in the prices of fresh fruit and vegetables, meat and energy costs.

"These price increases are most bothering because their impact on the real disposable incomes of households is largely unavoidable."

Toplis still believes annual inflation will remain relatively well contained over the medium term and should get back towards the mid-point of the RBNZ’s target band by Q3 2026.

"Indeed, we think slowing global demand, ongoing spare capacity in the New Zealand economy, slowing commodity price inflation and the potential reversal of any near-term oil price increases could well see inflation fall below 2.0% for a period of time." The BNZ economists still think the OCR will drop below 3% ultimately.

But the current situation is a problem.

"In the past the Bank [RBNZ] has implied it would look through any short term uptick in prices especially if they were shock-driven.

"But, equally, the Bank was clear, when it released its May Monetary Policy Statement that it was very nervous about rising inflation expectations. And recall that one member of the Committee was sufficiently nervous to vote against the rate cut that was delivered. That Committee member is going to feel no less unnerved this time around, and may well acquire a few friends."