Mike Jones: BNZ Chief Economist on inflation tracking lower than expected, possible OCR cuts

Another cut to the Official Cash Rate next month is looking a lot more likely. 

Latest Stats NZ figures show annual inflation has reached 2.7% in the year to June – up from 2.5% in the year to March. 

But core inflation is tracking much lower, and domestically driven non-tradeable inflation is at a four-year low. 

BNZ Chief Economist Mike Jones told Mike Hosking that it’s a green light for the Reserve Bank. 

He says the chance of not only reaching 3% in annual inflation, but also getting stuck above 3% has reduced, so the bank can probably feel more comfortably in cutting rates. 

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Episode Transcript

Speaker 1 (00:00):
So the wash up on inflation seems to be this
two point seven wasn't the two point nine they thought
it might be. The non tradable stuff like rates is
still a real issue. Of course in the RB will
have seen this, and basically I'm assuming locked in another
interest ratecoup next month. Mike Jones is the ben Z's
tip economists and as well as Mike Morning. What am
I The band is still going to be breached? Isn't
it eventually? Sometimes this year they're going to go above

(00:21):
three aren't they?

Speaker 2 (00:23):
I think it's a real chance. But I think the takeaway,
as he said from the numbers yesterday, was that bet
reducers now not only breaching three percent, but also getting
stuck above three percent, which which might have been an
issue for inflation and expectations it self perpetuating aspect of inflation.
So yeah, I think it's a green light or the

(00:43):
bank they can probably feel more comfortable in getting cracking
on rate caps again next month.

Speaker 1 (00:48):
And so what have they learnt then? Given they this
month they didn't and next month they will, and then
maybe they'll go again later on this year? What what's
changed material in the last week or so?

Speaker 2 (01:00):
Well? I mean one is your head on inflation is
a little bit lower. I think as we've seen the
data come in as well, it's still pretty soggy and
uninspiring sort of stuff as well. So I think that
means that or median term inflation, but that particularly focused
on they can be a little bit more confident that
once we get through this burst of temporary higher inflation,

(01:22):
that will settle down to back to two percent or
a bit below because the economy has got lots of
spare capacity right as if the activity is racing away,
and so lower interstrates are probably required to try and
boost activity and ensure inflation doesn't fall too far below
two percent next year.

Speaker 1 (01:40):
But do you know, I mean you're the expert, I'm not,
But I'm looking at the low number of what was
at one point two versus three point seven? How low
does that need to go? Because the councils are not
going to stop charging, and the CIA is not going
to stop charging, the insurance is not going to stop
going up. So when does all that finish and then
flow through to a lower inflation number.

Speaker 2 (02:00):
Well, we think we've got another quarter to come where
you're going to get higher headline inflation. So the third quarter,
we think we might get a two point nine, but
our hope is that that is the peak and thereafter
we start to see things tail away. I mean, one
thing that really jumped out from the numbers yesterday is
this gap that's opened up between its essentials inflation and

(02:23):
non essentials, sort of like not all inflation has created
equal It's hardly the sort of indicative of an accelerating economy.
The sort of inflation that we're getting in and of itself.
The fact that you're getting these higher costs for the
lights of food and energy, pulling income away from households
should actually slow things down even more, you know, retail

(02:46):
spending in the economy more generally. So I think we've
still got enough via I mean, it's pretty hard to
be confident about anything in the current environment, but there
are enough well there's enough evidence to suggest that this
is a temporary bout of inflation and we'll start to
set things cool off.

Speaker 1 (03:00):
Boy, I hope you hope you're right. Mike, Appreciate it.
Mike Giants, who is the benzid's chief economist.

Speaker 2 (03:06):
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