Economists say the September quarter annual inflation figure likely marks the peak and they still expect the Reserve Bank to cut the Official Cash Rate again next month

Despite annual inflation reaching just over the top of the Reserve Bank’s target range, no one seems particularly worried with one economist saying what matters for the central bank is its view on where inflation will settle next year.

On Monday, Statistics New Zealand shared that annual inflation, as measured by the consumers price index (CPI), rose to 3.0% in the September quarter from 2.7% in the June quarter.

The fact this figure was expected, coupled with an expectation that inflation will slow next year has led economists to forecast a drop in the Official Cash Rate (OCR) by 25 basis points - taking it from 2.5% to 2.25% in November. Westpac economists think there's about a 30% to 35% chance the RBNZ could consider a 50 point OCR cut too.

The RBNZ is charged with maintaining inflation between 1% and 3%, and it specifically targets 2%. While this latest figure is on the higher side of its targets, the RBNZ's Monetary Policy Committee expected this - with the committee previously noting inflation was projected to reach 3% in the September quarter.

Alongside this, economists were forecasting CPI to hit 3% to 3.1% this September quarter.

Following Statistics New Zealand’s CPI release on Monday, ASB chief economist Nick Tuffley says the CPI hitting the top of the target is “an unhelpful milestone that has nonetheless been long expected” - and it hasn’t stopped the central bank from cutting the OCR 75 basis points so far in the second half of this year.

“Those cuts, and any further ones, are based on the assumption that inflation will fall back pretty quickly to around 2% – back to best behaviour after a brief flirtation with bad behaviour," Tuffley says.

“It is the 2026-27 inflation outcomes the RBNZ will be focusing on. And given the extent of spare capacity in the economy, we don’t expect the brief spike will change pricing behaviours in a way that undermines the fall in inflation - competitive pressures remain too high.”

Unlikely to be major concern for RBNZ

Westpac NZ senior economist Satish Ranchhod says Monday’s result is unlikely to be a major concern for the RBNZ.

“While overall inflation has picked up, this rise is concentrated in less cyclical areas and much of that rise is likely to be temporary,” Ranchhod says.

“We continue to expect that inflation will drop back to levels comfortably inside the RBNZ target band next year.

“For the RBNZ, prices in discretionary spending areas or areas that are responsive to interest rates remains low. There was little in today’s release that would prompt them to change their projection for a moderation in inflation over the year ahead.”

This comes as last week, RBNZ chief economist Paul Conway told interest.co.nz that “when you’re forecasting inflation to be 3%, there’s a good chance that it prints a bit higher than that, meaning you’re outside of your target”.

(The latest annual inflation figure is technically 3.04% for the September quarter). 

“So we’re kind of balancing up that risk against the risk of a more prolonged period of excess capacity in the economy which is a key driver of medium-term inflation pressures," Conway said last Wednesday.

ASB's Tuffley says: “For the RBNZ, what matters is its view on where inflation will settle next year. The high amount of spare capacity present now will keep pulling down inflation for those parts that are sensitive to market pressures.”

Non-tradeable inflation has a bit further to fall, Tuffley says, and competition is keeping a lid on margins. “Food price inflation will also slow.”

A 25 basis-point cut to the OCR for November?

ASB economists expect the RBNZ to cut the OCR by 25 basis points in November with Tuffley saying: “Anything beyond that depends on the signs the economy shows that it is responding to the considerable fall in interest rates.”

The New Zealand Institute of Economic Research (NZIER) says although the latest annual inflation rate figure is at the top of the RBNZ’s inflation target band, “inflation looks broadly contained in the New Zealand economy”.

“The annual increase in some core inflation measures, such as CPI excluding food, energy and fuels, remains well within the inflation target band at 2.5%,” NZIER says.

While the NZIER did forecast a 25 basis point cut to the OCR in November, it says “the RBNZ faces a tricky balance between providing enough stimulus to support a recovery in the New Zealand economy over the coming year without reigniting inflation”.

ANZ senior economist Miles Workman says the latest annual inflation figure was mildly weaker than ANZ's expectations of 3.1%.

“Clearly the high frequency data and inflation expectations are a must-watch between now and the November Monetary Policy Statement (MPS), but today’s data certainly don’t present any challenge to the RBNZ’s August forecast: underlying inflation is slowing largely as forecast.

“We continue to expect a 25 bp (basis point) cut in November.”

Infometrics economist Matthew Allman says "today’s data is unlikely to change the Reserve Bank’s thinking ahead of the final Monetary Policy Statement for the year in November, as both tradable and non-tradable inflation were broadly in line with the Bank’s forecasts".

"We expect the official cash rate to be cut to 2.25% next month, with limited scope for a further cut in early 2026 if the economy’s recovery remains patchy."

Labour market data, which will be released on November 5, is "likely to show a further rise in unemployment, supporting the decision for a cut next month, although other high-frequency data could alter the bank’s decision", Allman says.

Kiwibank senior economist Mary Jo Vergara and economist Sabrina Delgado say while inflation has climbed to the top of the band this September quarter - it stops there. 

"The September quarter will likely mark the peak in inflation. The current December quarter is also typically the weakest quarter for inflation with seasonally weak food prices as well as the usual retail discounting that takes place," Vergara and Delgado say.

"With that in mind, we expect inflation to fall back below 3% from here. And the risks further out are still tilted to the downside as the economic undercurrents are weak."

They also expected a move to 2.25% in the cash rate next month. 

Government welcomes inflation announcement

Acting Minister of Finance Chris Bishop welcomed the latest annual inflation figure announcement.

“Expectations are that the rate will decline towards 2% in the first half of next year, easing pressure on households and businesses,” Bishop says.

“However, continued discipline will be required by the Government to ensure inflation does not return to the 7.3% peak it reached under the previous Government in 2022.”

And he said the latest inflation news "highlights the importance of increasing electricity supply and competition, and the significant impact that local government rates have on New Zealanders’ wallets".