- Welcome to 2025. There’s still a couple hurdles to jump over. But we’re excited for the recovery that 2025 should bring. Business confidence keeps climbing (see COTW).
- This week, we’re right back into it. The latest Kiwi inflation print for Q4 is due out on Wednesday. By our calculations, we see inflation slowing a smidge to 2.1% from 2.2% - the lowest since June 2021.
- With the Kiwi dollar under the crunch, it’s a good time to revisit our last episode of Markets, Mystics & Mayhem. As we had thought, interest rate differentials, helped by the ‘Trump Trade’ has seen the Kiwi trade below 56c. Bang in line with our call for the Kiwi to hit 55c.
Welcome to 2025. It should be a much better year than last year. We’re going into 2025 feeling optimistic for the Kiwi economy with rates continuing to fall and inflation stabilising at 2%. Yes, there’s still a couple of hurdles to get through. And we’re bound to get some surprises along the way. But ultimately, we’re excited for the recovery that is coming. Be sure to check out “Pick a path: ‘Alive in 25’ or ‘Thrive in 25’” for more on our outlook for the year ahead.
For now though, we’re getting straight into it with a lot on the calendar. We’ve already seen a significant lift in business confidence with the release of NZIER’s Quarterly Survey of Business Opinion last week (see our COTW for more). And this week we’re gearing up for the latest snapshot of Kiwi inflation – out on Wednesday.
We’re expecting some good news for the final quarter of 2024. By our calculations, we see inflation slowing a smidge to 2.1% from 2.2% - the lowest since June 2021. Over the quarter, we expect consumer prices rose 0.4%, a deceleration from the 0.6% in the September quarter. Our forecasts are broadly in line with the RBNZ’s expectations.
We can thank imported inflation for driving headline inflation back towards 2%. Indeed, today’s inflation is all homegrown. We expect annual tradables to remain in negative territory (deflation) at -1.3%. Fuel prices have been especially weak. According to StatsNZ, petrol prices fell more than 1% over the quarter. Providing some offset, however, will be the rise in airfares. Over the past three months, domestic airfares rose 9.4% while international airfares increased 6.9%. Arts and recreation, specifically accommodation costs, will likely see a boost. That’s typical over the holiday months. Similarly, seasonal weakness in fresh produce has seen food prices overall record a 0.6% decline over the quarter.
Domestic inflation, in contrast, is a slow-moving beast. The good news is that it has turned. We expect annual non-tradables to slow to 4.5% from 4.9%. It is some distance from the 6.8% peak, but is still sitting high above the long-term average (~3%). A more meaningful slowing in services inflation is needed to ensure a sustainable return to 2%. On this front, spare capacity continues to grow within the economy and the labour market has undoubtedly softened. That’s key for a further cooling in services inflation.
For the RBNZ, the underlying trend in inflation is more important for policy. Core measures of inflation strip out the volatile price movements. Encouragingly, core inflation has been trending south since hitting the 6.7% peak at the end of 2022. In the year to September 2024, core inflation fell to 3.1%. We expect more progress was made over the December quarter, with measures of core inflation falling back within the RBNZ’s target band.
All up, Wednesday’s update, if as expected, should keep the RBNZ on course to deliver another 50bp cut to the cash rate at its February meeting.
Financial Markets
The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.
In currencies, the Kiwi dollar starts 2025 on the backfoot.
“Over the festive break, the Kiwi dollar also had a break…lower, falling as the US Dollar continued to be favoured on the back of Trump’s incoming US protectionist strategies and plethora of tariffs. Also the market had a more pessimistic view in regards to the likely pace of rate cuts from the Fed in 2025, which has seen the US dollar maintain strength as the US economy continues to perform well compared with its peers. As we neared the end of December, the Kiwi was tracking at the 0.5600 level, and had a brief run higher in early January to 0.5688 before peeling back towards 0.5600 again. The US nonfarm payrolls report showed plenty of resilience in the US labour market, which saw the Kiwi hit a low early last week of 0.5544. As last week progressed, US CPI indicated that the Fed could afford to be a little less cautious as US inflation continues to track in the right direction, reducing again in December. The US dollar was lower and the Kiwi found support again, closing the week at 0.5610 after a brief lift to 0.5647. In the weeks ahead there is plenty to consider. Risk sentiment has returned, albeit modestly, as the Israel-Hamas ceasefire deal came closer to fruition, and concerns about a resurgence in global inflation were put on the back burner. For the Kiwi dollar however, there is not a lot of potential support on the horizon. We don’t hear from the RBNZ again until February, when they are largely expected to deliver another 50bp cut. This will also likely see the Kiwi under pressure. And once Trump is inaugurated, we may see an uptick in volatility as he will most likely want to deliver plenty of punch on the rhetoric around his proposed tariffs. The actual implementation may be harder than the crowing however. Our outlook for the first half of 2025 is largely to the downside for the Kiwi, as the rate differentials widen as the RBNZ cuts. We are still in stagnant territory as far as a recovery for our own economy too. But once the continued RBNZ cuts start to have a meaningful impact, we should see some recovery in the Kiwi dollar. On the NZDAUD front, there is not a lot to report, with the antipodean cross still trading in the 0.9000/0.9050 level.” Mieneke Perniskie, Trader - Financial Markets.
Weekly Calendar
- Here at home, the first big data release is due out. The consumer price inflation print for the December quarter will be released on Wednesday. Monthly price indicators point to a further easing in inflation over the quarter, with market consensus for a 0.5% rise (down from 0.6% in Q3). Such an quarterly move would leave the annual rate unchanged at 2.2%. The data is an important release ahead of the RBNZ's February decision (see above for our preview).
- The main (historic) even this week is the inauguration of President-elect Donald Trump, where the President will reportedly sign more than 100 executive orders. Border security and tariffs will no doubt be the main feature.
- UK labour market data will likely show a lift in wage growth to 5.6% in the three months to November, from 5.4% previously. Although, base effects largely explain the increase. The unemployment rate for the same period is expected to rise to 4.4% from 4.3% - however, a low response rate to the Labour Force Survey continuest to hamper the results. Other data sources suggest labour demand has significantly cooled in recent months.
- The Bank of Japan will announce their latest policy decision this week. Consensus expects the BoJ to deliver on its hawkish policy pledge, by raising its target rate 25bp to 0.50%. The BoJ ended its negative interest rate policy in March last year, and raised rates to 0.25%. Confidence has grown that Japan will sustainably meet the BoJ's 2% inflation target. Indeed, domestic pay growth continues to strengthen. Indeed, the BoJ may lift its inflation projections in the outeryears, reflecting rising labour costs.
See our Weekly Calendar for more data releases and economic events this week.
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