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Smaller than expected increase in inflation suggests interest rates nearing its peak

By Christina Leung, Principal Economist for the New Zealand Institute of Economic Research


The eagerly anticipated release of March quarter Consumer Price Index (CPI) data showed a softer than expected inflation result. The 1.2 percent increase in prices over the quarter brought annual CPI inflation to 6.7 percent for the year to March 2023. While still well above the Reserve Bank’s 1 to 3 percent inflation target band, the result was lower than what markets and the Reserve Bank had forecast. In particular, the weaker than expected non-tradable inflation result suggested capacity pressures in the New Zealand economy are becoming less acute.  

Other inflation indicators have been mixed, but do suggest that inflation pressures in the New Zealand economy has peaked. The March quarter NZIER Quarterly Survey of Business Opinion (QSBO) showed businesses reported a moderation in cost pressures over the first quarter of 2023, as labour shortages and supply chain constraints eased. However, a greater proportion of businesses reported having increased prices in the March quarter.  

Monetary policy tightening by the RBNZ has reduced housing demand 

The RBNZ has increased the Official Cash Rate (OCR) since November 2021 in response to a surge in inflation. While broader demand in the New Zealand economy has only started to show signs of softening in more recent months, the negative impact of higher interest rates on housing demand has been more immediate. This reflected the higher interest rates borrowers faced in taking out new mortgages, as well as banks’ increased caution towards lending for property. Overall, this tighter access to finance has reduced housing market activity and put downward pressure on house prices.  

Recovery in net migration should support housing demand over the longer term 

While new borrowers have felt the immediate impact of the OCR increases since November 2021, many households on fixed term mortgage rates will only face higher borrowing costs as they roll off historically low fixed term rates. RBNZ data shows around half of mortgages are due for repricing over the coming year, with many of these likely to face a significant increase in mortgage repayments. This lagged transmission of monetary policy means that we will likely see further slowing in the New Zealand economy over the coming year.  

However, net migration inflows into New Zealand have been picking up as international border restrictions were progressively relaxed. This migration-led population growth should support housing demand over the longer term. We expect a housing market recovery from next year, as markets become more certain that interest rates have peaked and net migration inflows underpin renewed housing market activity.