RBNZ Chief Economist Paul Conway stated in a speech today that Official Cash Rate at 4.25% remains “north of neutral”. The central bank estimates the neutral rate between 2.5% and 3.5%.
“Easing domestic pricing intentions and the recent drop in inflation expectations help open the way for some further easing,” Conway added.
However, Conway emphasized a cautious approach, noting that policymakers will “feel our way” as rates approach neutral. RBNZ will continuously reassess its neutral rate estimate, adjusting based on economic conditions.
If neutral is underestimated, stronger-than-expected activity and inflation would signal a less restrictive policy than intended, prompting recalibration, he added.
The central bank expects potential output growth to range between 1.5% and 2% annually over the next three years, reflecting a lower economic “speed limit.” This weaker outlook stems from sluggish productivity and reduced net immigration, limiting long-term economic capacity.
Australia’s CPI slows to 2.4% in Q4, trimmed mean CPI down to 3.2%
Australia’s Q4 CPI rose just 0.2% qoq, same as the prior quarter, falling short of expectations of 0.4% yoy. Trimmed mean CPI also undershot forecasts, rising 0.5% qoq versus the expected 0.6% qoq.
On an annual basis, headline CPI slowed from 2.8% yoy to 2.4% yoy, slightly below 2.5% yoy consensus. Trimmed mean CPI fell from 3.6% yoy to 3.2% yoy, missing 3.3% yoy estimate.
These weaker inflation prints reinforce expectations that RBA may begin easing policy as early as its February 17-18 meeting.
The decline in annual inflation was largely driven by steep drops in electricity prices (-25.2%) and automotive fuel (-7.9%). Goods inflation slowed sharply to 0.8% yoy, down from 1.4% yoy in Q3. Meanwhile, services inflation remained elevated at 4.3% yoy, though slightly lower than the 4.6% yoy in the previous quarter.
In December, monthly CPI rebounded from 2.3% yoy to 2.5% yoy, matched expectations.
Full Australia CPI release here.