New Zealand saw a surprise increase in inflation during the first quarter of 2025, with the Consumer Price Index (CPI) rising 0.9% compared to the previous quarter, exceeding market expectations of a 0.7% increase. On an annual basis, prices rose 2.5%, compared to 2.2% in the fourth quarter of 2024. Despite this increase, the rate remains within the Reserve Bank of New Zealand’s target range of 1% to 3%.
Several factors contributed to this increase, most notably rising costs of fresh food, gasoline, and education. However, most of these gains are believed to be temporary, as gasoline prices fell sharply in the second quarter and are expected to exert a significant drag on the CPI. Higher education costs are also attributed to the end of government grants, which will also be reflected in this quarter.
Statistics New Zealand noted that the annual increase in rents was the lowest since 2021, and that rents are the largest item in the CPI basket. Overall, less than a quarter of the basket rose by 5% or more, the lowest rate in four years.
In this context, the Reserve Bank of New Zealand cut its official cash rate by 25 basis points to 3.5% in April 2025, signaling the possibility of further monetary easing in the future, especially in light of rising global trade tensions.
Markets are anticipating an additional quarter-point rate cut at the next policy meeting on May 28, with rates expected to reach a potential low of 2.75% by October.
ANZ, for its part, revised its forecast to include further easing to 2.5%, reflecting mixed economic news at home and a more gloomy outlook for the global economy in light of US President Donald Trump’s ever-changing tariff plans.
December 2024: New Zealand Inflation Beats Expectations, But Doesn’t Halt Rate Cuts
Sharon Zollner, Head of New Zealand Economics at ANZ, noted that trade tensions and ongoing uncertainty surrounding global growth and market expectations are likely to weigh on confidence among households and businesses, eroding a key pillar of support for the recovery. She added that further policy support is needed to maintain the recovery path.
In light of these developments, the Reserve Bank of New Zealand plans to maintain its accommodative monetary policy through 2025 and will likely cut interest rates further at upcoming meetings to address the economic and business challenges facing the country.
New Zealand recorded an increase in inflation during the December 2024 quarter, slightly exceeding market and policymaker expectations. Despite this jump, expectations still point to a third significant interest rate cut by the Reserve Bank of New Zealand next February. Inflation figures exceed estimates, but only marginally.
According to official data, inflation rose by 0.5% in the fourth quarter of 2024, and by 2.2% year-on-year. These figures were slightly higher than market and central bank estimates, but did not cause a shock that would alter monetary expectations. On the contrary, analysts considered the slight increase insufficient to threaten the current path of monetary policy.
It is worth noting that the annual rate remained stable compared to the third quarter of the same year, approaching the midpoint of the Reserve Bank of New Zealand’s target range of 1% to 3%. This stability supports the bank’s position to continue cutting interest rates to boost economic activity.
Domestic pressures ease while global factors assert their influence
Inflation details showed that non-tradable goods, which represent prices influenced by domestic demand, slowed to 4.5% year-on-year, down from 4.9% in September. This slowdown is a clear sign of easing domestic price pressures.
Stabilizing core inflation supports continued monetary easing.
One of the most closely watched indicators by the Reserve Bank of New Zealand is core inflation, which excludes food, energy, and fuel prices. This index rose 0.9% during the quarter and 3% year-on-year, representing a slight slowdown compared to the previous quarter.
Despite this slight slowdown, core inflation remains at the upper end of the target range, indicating some underlying pressures persist. However, these levels are not high enough to discourage the Bank from continuing monetary easing.
Meanwhile, the Bank is expected to release its preferred measure of inflation, the “sectoral factors” model, on April 17. This indicator recorded 3.4% in September, reflecting relatively stable price pressures across various sectors.
Markets are bracing for another 50 basis point cut
Following the release of the inflation data, market expectations have not changed significantly. Swap markets are still pricing in a potential 50 basis point cut on February 19, with a probability exceeding 90%. This cut, if implemented, would be the third of its kind this cycle. Markets also expect a total rate cut of more than 100 basis points over the remainder of 2025. This forecast reflects the belief that the New Zealand economy still needs significant monetary support amid a global slowdown and rising external risks.
Domestic data, with the exception of some key reports such as the Labor Force Survey scheduled for February 5, does not indicate sufficient pressure to derail the rate cut..
New Zealand Dollar Reflects Its Sensitivity to US Policy
In currency markets, the New Zealand dollar has begun to exhibit behavior more closely tied to international factors, particularly US trade policy. The NZD/USD pair has experienced significant volatility recently.
The pair broke the downtrend that began in November, indicating a possible bottom. Despite the previous sharp decline, the decline has not held.
Trump Threatens Tariffs, Markets Await Response
In his first days in office, US President Donald Trump did not issue executive orders to impose tariffs, despite previous threats. Markets still hope that trade negotiations will be prioritized, rather than immediate escalation.
In this context, the New Zealand dollar serves as a barometer of US trade policy uncertainty. Any signs of easing could boost the kiwi’s value, while escalation would put additional pressure on the currency.
Rate cut remains the most likely path
Although inflation has slightly exceeded expectations, signs of slowing domestic pressures, steady core inflation, and a weaker dollar all increase the chances of a rate cut. There are few strong indications that the Reserve Bank of New Zealand will reverse this course.
The next challenge lies in international developments, particularly the US administration’s stance on trade policy. If this environment stabilizes, New Zealand will have an opportunity to restore balance without the need for further aggressive stimulus. Until then, however, a rate cut remains the preferred option for the Bank to ensure price stability and promote growth in the face of mounting global uncertainty.
