Does NZ have an inflation problem? What rising prices mean for interest rates

The five things you need to know about the housing market this week.

1. Inflation data doesn’t change the OCR path

Last week’s consumers price index from Stats NZ confirmed we’ve still got an inflation problem, with the headline rate rising from 3.1% in Q1 to 4.1% in Q2 – well above the 1-3% target band over the medium term, and the highest rate since 4.7% in Q4 2023. Stats NZ noted that higher petrol prices accounted for around a quarter of the latest annual rise in the CPI, or in other words, take out that effect and inflation would have been closer to 3%. But other things went up too, including a 12% annual rise in electricity and roughly 9% for council rates.

All that said, none of this was too surprising, and in fact the 4.1% inflation rate was pretty close to what most commentators had been expecting anyway. Meanwhile, across a range of core inflation measures, perhaps the most important point is that – apart from fuel – there isn’t yet much clear evidence that second-round price pressures are emerging.

That will be reassuring to the Reserve Bank. But even so, just because broad-based price pressures haven’t shown through yet, it doesn’t mean they won’t – and on the whole, there wasn’t really anything in the latest CPI data to dissuade the RBNZ from steadily pushing the OCR back up to neutral in the coming months. Another rise in September still seems likely, suggesting that the risks around mortgage rates are also to the upside.

2. Housing rents remain sluggish

Even though wider inflation remains an issue, at least the housing market isn’t playing much of a role. After all, construction costs are relatively controlled for now, and property values themselves remain subdued. Last week’s CPI also showed that rent inflation has recently fallen to a multi-decade low, with the balance between physical housing supply and demand having balanced out to some extent in recent years. Net migration is now slowly edging higher again, so rents may not stay this soft forever. But a fresh spike doesn’t seem particularly likely either.

3. There could still be a window of time for bank switching

One of the key data releases this week (Monday) will be the Reserve Bank’s mortgage lending stats for June. May’s data showed a definite slowdown in mortgage lending activity, and something similar seems to be on the cards for June too. As always though, I’ll also be focusing on the data split by LVR, DTI, interest-only, and also loan type. Recently, there’s been a lot of focus on bank switching/refi – this has eased a bit, but is still quite strong, and given that 10% of existing debt is floating along with 30% fixed but to expire within the next six months, there’s probably still a fair degree of switching that could take place before the end of the year.

Cotality chief economist Kelvin Davidson: "Another rise in September still seems likely." Photo / Peter Meecham

4. Filled jobs are vulnerable?

This week (Tuesday) we’ll also get Stats NZ’s filled job data for June. If anything, employment has been holding up a bit better in recent months than might have been expected given the US-Iran backdrop. But there’d seem to be a likely fragility lingering just beneath the surface, so it wouldn’t be a surprise to see modest falls in filled jobs at some stage soon. That’s a headwind for housing.

5. Keeping an eye on wage negotiations

Meanwhile, ANZ’s business and consumer confidence surveys for July will be out on Thursday and Friday this week. Sentiment amongst both firms and households has probably dipped again as the US-Iran peace deal falters, but perhaps there’ll be more focus on input cost/output price/inflation expectations measures. This is where any influence on monetary policy could come from, in particular any signs that businesses are seeing workers asking for higher wages to counter the rising cost of living. This could raise the risk of "second round" inflation emerging.