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(Bloomberg) — New Zealand home-grown price pressures persisted in the first quarter even as headline inflation slowed to its weakest in almost three years. 

Annual inflation eased to 4% from 4.7% in the fourth quarter, Statistics New Zealand said Wednesday in Wellington. That’s the lowest reading since the second quarter of 2021 and matched economists’ expectations. However, non-tradables inflation — a closely watched indicator of domestic price pressures — barely slowed to 5.8%.

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The central bank’s tight monetary policy tipped the economy into a double-dip recession last year, but policymakers are reluctant to entertain cutting the Official Cash Rate until they’re sure inflation will return to their 1-3% target band. The Reserve Bank expected inflation would slow 3.8% and that the non-tradables measure would gain 5.3%.

“There was a degree of strength in the details suggesting that domestic inflation pressures are proving stubborn to stamp out,” said Kim Mundy, economist at ASB Bank in Auckland. “The RBNZ will be very wary of the risk of inflation being stuck above 3%. We now expect the RBNZ to wait until February 2025 to cut the OCR.”

The local currency dropped as much as 0.3% after the annual inflation reading was initially incorrectly reported as coming in below estimates. It then rebounded, extending an earlier rise, to buy 58.95 US cents at 12:01 p.m. in Wellington. The yield on policy sensitive two-year government bonds rose eight basis points to 4.99%. 

Last week, the RBNZ kept its cash rate at 5.5% after signaling in February that it didn’t expect to ease policy until 2025. Before the inflation report, most economists expected a rate cut in the second half of this year, but ASB now joins ANZ Bank and Westpac in predicting the RBNZ will delay pivoting until next year. 

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RBNZ Caution

While the RBNZ has projected inflation will fall below 3% in the third quarter this year, policymakers have also said they are concerned that core inflation is “sticky” and are mindful that inflation expectations could rise, driven by components they have little control over such as local government land taxes, insurance costs and rents.

“There was nothing in the release today that supported bringing forward the easing cycle,” said Stuart Ritson, a fixed income strategist at Bank of New Zealand in Wellington. 

Non-tradables prices rose 1.6% in the quarter, accelerating from 1.1% in the final three months of 2023 and more than the 1.3% tipped by economists.

Tradables prices, which reflect movements in global commodities and imported items, fell 0.7% in the quarter and rose 1.6% from a year earlier, down from 3% in the fourth quarter.

New Zealand is not alone in finding inflation difficult to budge. A key measure of US consumer prices rose more than forecast for a third straight month in March, increasing concerns that inflation is re-accelerating and prompting investors to reassess bets on when the Federal Reserve will start cutting rates.

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Consumer prices advanced 0.6% from three months earlier, matching economists estimates, driven by rents, tobacco prices and home construction costs, the statistics agency said. Nine of 11 groups in the consumers price index basket showed increases.

Measures of core inflation were mixed, today’s data showed. Consumer prices excluding food, fuel and energy rose 4.1% from a year earlier, matching the pace in the fourth quarter, while the 30% trimmed mean measure rose 4.5% from a year earlier, slowing from 5%.

—With assistance from Matthew Burgess.

(Updates currency reaction in fifth paragraph)

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