New Zealand inflation eases, opening path for big rate cuts

The inflation rate ran at an annual pace of 2.2% in the quarter, near the midpoint of the desired 1% to 3% target band, with some economists warning that the Reserve Bank of New Zealand must continue lowering the official cash rate at speed as a neutral policy rate is still well off in the distance.

The annual increase in inflation compares with a rise of 3.3% in the second quarter, StatsNZ said Wednesday. Inflation rose by 0.6% in quarterly terms.

The inflation data justifies the 75 basis points of cuts announced so far since August, with the RBNZ stepping up the pace of lowering the official cash rate last week by joining the Federal Reserve in slashing by 50 basis points.

Economists warn that there is a risk that inflation will undershoot the target band in coming quarters, especially if the RBNZ backs away from more significant cuts.

The official cash rate has so far fallen to 4.75% from 5.50%, with a neutral policy rate likely closer to 3.00%, according to economists.

New Zealand’s farm-rich economy has been in and out of recession for years as the RBNZ proved to be one of the more aggressive central banks globally when combating the inflation surge that emerged after the Covid-19 pandemic.

Economic activity remains flat and in need of resuscitation, especially with growth in China, its main trading partner, in a slowdown, economists said.

Higher rents were the biggest contributor to the annual inflation rate, up 4.5%. Almost a fifth of the annual increase in the consumer-price index was due to rent prices.

Prices for local authority rates and payments increased 12.2% in the 12 months to the third quarter, StatsNZ said. Prices for cigarettes and tobacco also rose sharply in line with an annual excise-tax increase.

Still, lower prices for gasoline and vegetables helped to offset rising prices, StatsNZ added.

Write to James Glynn at james.glynn@wsj.com