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New Zealand’s inflation remained steady at 3.1% in the first quarter, staying above the central bank’s target and coming in higher than expected. A stronger-than-forecast quarterly rise in consumer prices has increased the likelihood of a rate hike in the coming months. Electricity prices were the biggest contributor to inflation, while financial markets reacted with a rise in the New Zealand dollar and swap rates. Despite rising fuel costs linked to global tensions, a business survey indicated that overall inflation pressures across firms remain contained for now.
New Zealand’s annual inflation rate stood at 3.1% in the first quarter, remaining unchanged and above the central bank’s target range, while also exceeding market expectations of a slowdown. The data has strengthened the case for further interest rate hikes in the coming months. Advertisement
The consumer price index rose by 0.9% compared to the previous quarter, slightly higher than economists’ expectations of 0.8%. On an annual basis, inflation was expected at 2.9% but came in stronger, indicating continued price pressures in the economy.
The Reserve Bank of New Zealand aims to keep inflation within a 1% to 3% range over the medium term. However, the latest figures show inflation continuing to stay above this band, raising concerns for policymakers.
Financial markets reacted quickly to the data. The New Zealand dollar rose by 0.4% to USD 0.5916, while two-year swap rates increased by 5 basis points to 3.3951%. Market pricing now suggests a 42% probability that the central bank could raise its current cash rate of 2.25% by 25 basis points in May, compared to less than 30% a day earlier.
An economist from ANZ, Miles Workman, stated that the stronger starting point for headline inflation and lack of progress in non-tradable inflation would not be favourable for the Monetary Policy Committee, especially at a time when inflation expectations risk moving higher. He added, however, that headline inflation alone does not determine policy decisions and that the data offers limited new insight into the persistence of inflation.
Earlier in the month, the central bank had projected annual inflation at 3.0% for the quarter, with expectations that it could rise further to 4.2% in the June quarter. This increase is likely to be driven by higher oil prices linked to the ongoing conflict in the Middle East, which is expected to impact domestic pricing.
The Reserve Bank has kept the cash rate unchanged at 2.25% since December. It has indicated that it is prepared to take action if inflation rises further and has also warned that global geopolitical tensions could increase inflation while slowing economic growth.
Data from Statistics New Zealand showed that electricity prices were a key driver of inflation, rising by 12.5% over the year. A spokesperson from the agency, Nicola Growden, stated that higher electricity prices contributed more than a tenth of the overall annual inflation increase. She further noted that this marked the third consecutive quarter where electricity was the largest contributor to inflation.
At the same time, a quarterly business survey released by the New Zealand Institute of Economic Research indicated that inflation pressures remain relatively contained across businesses, despite the recent increase in fuel prices. This suggests that while headline inflation remains elevated, underlying cost pressures may not be accelerating at the same pace.
Source Reuters
5th Jun, 2025
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