The June quarter Consumers Price Index inflation figures coming out on Monday shouldn't deter the Reserve Bank from making another OCR cut in August - unless there's a nasty surprise

So, who left the back door open?

Just when we thought inflation had been sent packing, with its rapidly deflating tail between its legs, back it comes for another annoying visit.

Remember, this is the same inflation that shot up to a peak of 7.3% in the June quarter of 2022 - so, three years ago now. And this necessitated the Reserve Bank (RBNZ) cranking the Official Cash Rate all the way from the pandemic emergency setting of 0.25%, as of early October 2021, to 5.5% in May 2023. 

Mortgage rates reacted accordingly. In mid 2021 the average one-year fixed 'special' rate, for example, was at 2.2%. By the end of 2023 this rate peaked at 7.3%. In the mid part of 2024 we duly then had a short, sharp, recession, with GDP shrinking by 1.0% in each of the June and September 2024 quarters.

Ah, but all this got to inflation, and it withered (eventually), re-entering the RBNZ's 1% to 3% target range (for the first time since March 2021) in September of last year. In August 2024 the RBNZ started reducing the OCR from that 5.5% peak, with six consecutive cuts down to 3.25% and then the 'pause' on July 9.

But now inflation's coming back and how bothered should we be and, crucially for those interest rates, how bothered might be the RBNZ? Bothered enough to stop cutting rates? 

Inflation was definitely top of mind for the RBNZ at its review of the OCR on July 9, 2025. The first paragraph of the RBNZ's Monetary Policy Committee (MPC) press release dealt, necessarily, with the fact that the MPC had decided to leave the OCR unchanged on 3.25%. But the inflation spectre wasn't far behind. 

The second paragraph said this:

Annual consumers price inflation will likely increase towards the top of the Monetary Policy Committee’s 1 to 3 percent target band over mid-2025. However, with spare productive capacity in the economy and declining domestic inflation pressures, headline inflation is expected to remain in the band and return to around 2 percent by early 2026. 

So, that's certainly getting the 'elephant in the room' to make itself known, and have a walk around the room so people can have a good look and form some views.

In the 'raised eyebrow' language of the RBNZ, what that paragraph tells us is that our central bank knows inflation's about to reach levels that will cause some intaking of breath, but it's okay about it because it thinks it will a temporary spike - and crucially this will not stop the RBNZ from lowering the OCR again.

Anyway, we don't have too long to wait for more details, with Statistics New Zealand releasing the Consumers Price Index (CPI), giving us the June quarter reading on inflation, on Monday, July 21. 

Just to refresh memories, the annual inflation figure as at the March quarter was 2.5%, up from 2.2% in December. Remember, the RBNZ's targeted range is 1% to 3%, but it explicitly aims for 2%. 

I didn't have the inflation previews from all the main bank economists in front of me at the time of writing this. The Selected Price Indexes (SPI) - which now give a read on 47% of the components of the CPI, including food, rent, air fares, travel accommodation and power - were released only on Thursday (July 17) and so, not unnaturally, everybody wanted to have a good look at those before giving final indications of what they thought would be in the CPI. But it seems that an annual inflation figure of 2.8% or 2.9% as at the June quarter is now expected. That's uncomfortably close to the top of our 1% to 3% range. 

Will the RBNZ be surprised? Well, its most recent forecast, contained in the Monetary Policy Statement (MPS)  released on May 28 was for annual inflation to come in at 2.6%, rising to 2.7% in the September quarter.

So, yes...2.9% would be a reasonable bit higher than that, but that forecast, from May, is already dated and we know from the RBNZ July 9 comment further up this article that the RBNZ has since moved its sights higher in terms of what it's expecting, so, it won't be perturbed by a 2.9% figure. But what about 3.0%, 3.1%, 3.2%?

Well, this was the key sign-off sentence in the July 9 press release:

If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further. 

So, in other words, no surprises and we'll cut rates again. An August cut, taking the OCR down to 3.0% is widely expected...subject to no nasty surprises.

A final, interesting, point to note about the RBNZ's statement is that the central bank now appears to have decided that the likely impacts of tariffs will prove disinflationary rather than inflationary, thus:

However, heightened global policy uncertainty and tariffs are expected to reduce global economic growth. This will likely slow the pace of New Zealand’s economic recovery, reducing inflation pressures. 

...Which all reads a bit, good news-bad news to me. The economic recovery has been delayed so that we may enjoy lower inflation.

And signs are that the economic recovery is indeed looking a bit wobbly. Our March quarter GDP came in with a better than expected 0.8% growth, but the June quarter might have been rather closer to zero and possibly even below. (We won't see the figures till September.)

The BNZ-Business NZ Performance of Manufacturing (PMI) and Performance of Services (PSI) indexes tanked in May, which could at face value have been just a kneejerk reaction to the original April tariff announcements. However, the June PMI and PSI results, while better, were not significantly better and as BNZ economists said were "consistent with an economy in recession".

However, to go back to the RBNZ's May MPS, the central bank forecast GDP growth of 0.3% in June and then just 0.2% in September. So, a 'stalled' recovery ain't going to surprise the RBNZ folk.

But if there is one thing that IS looking a little surprising, that's the potential strength of domestic inflation. As the SPI have been telling us, in April, May and now June, food prices (which make up about 19% of the CPI) have been surging, up to an annual rate of 4.6% (and the ASB economists reckon the rate may yet hit 5% before starting to decline). And of course, also surging have been power prices. Now, if there's one thing households do notice, it's if the little indulgences in life - like buying food, and turning on the heater - are costing more.

Such noticeable types of inflation risk kicking off another wave of 'inflationary expectations'. The RBNZ has worked very hard to head off the wave of inflationary expectations that followed the post-pandemic inflation surge. There's no current sign that inflationary expectations are blipping up again, but a run of overpriced supermarket visits and cold nights could change things. 

Figures for the March quarter showed that so-called 'non-tradable' inflation, basically domestic inflation, was running at an annual rate of 4.0%. Much of the push lower for inflation in the past year has come from falling 'tradable', or imported inflation, which registered an annual rate of just 0.3% as of the March quarter.

The RBNZ thinks domestic inflation will keep coming down, while imported inflation may rise again in the short run (global volatility etc). The RBNZ's May MPS forecast for domestic inflation was that it would be down to 3.7% as of June, then 3.5% in September and 3.4% by the December 2025 quarter. (Among forecasts I have seen, Westpac economists reckon the June quarter domestic inflation figure will be 3.8%, while ANZ's economists say 4.0%). 

As we've said before, the RBNZ can't do that much about imported inflation, other than grinning and bearing it, but domestic inflation - well, that's where the OCR comes in. 

So, the RBNZ would be concerned if those domestic inflation figures come in higher than expected, especially if that's accompanied by signs of rising inflation expectations. There's plenty to watch out for.

I'll leave you with this nice, summing up, quote from ANZ senior economist Miles Workman (who expects an annual CPI figure of 2.9% on Monday):

The RBNZ will need to balance any upside surprise in the CPI against the signal from the high-frequency data, which is currently pointing to a stalling recovery and therefore downside risks to the medium-term inflation outlook. Given this, we think it would take a sizable upside surprise in the CPI to take an August [OCR] cut off the table.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.