Inflation and interest rates are falling

There is light at the end of the tunnel for the economy as inflation and interest rates continue to fall.

The ASB's latest quarterly forecast assumes that economic growth will stagnate or decline for the rest of the year, while global growth will also remain below average.

GDP, which had shrunk in two of the last six quarters through March 2024, was also 0.5 percent below its 2022 peak year-on-year, and per capita it fell by more than four percent.

Nick Tuffley, ASB chief economist, said the economy was “showing increasing signs of fragility under the continued pressure of high interest rates” but better days were ahead.

“As painful as it is, inflation is slowly coming under control,” he said.

“Recent encouraging signs suggest that the Reserve Bank can be confident that inflation will fall below 3% in the second half of this year and remain well controlled beyond 2024.”

The Reserve Bank cut its key interest rate by 25 basis points to 5.25 percent last week and expects further declines for the rest of the year and into next year.

“Falling interest rates will be a catalyst for renewed consumer and investment spending and boost the economic recovery in 2025,” Tuffley said.

While budget spending remains under some pressure, it has started 2024 well compared to 2023, he said.

Tuffley said the New Zealand dollar is expected to strengthen over the course of 2025 as global growth recovers and the US Federal Reserve cuts interest rates, with the NZD expected to rise to 70 US cents by March 2027.

“However, the NZD could come under pressure in the short term if the RBNZ cuts interest rates before the US Federal Reserve,” he said.

“The New Zealand dollar could fall slightly below 0.90 against the Australian dollar, although Australia's relative economic superiority is increasingly reflected in the exchange rate.”

rnz.co.nz