Inflation up to 4.1%, where from here?
As expected, June quarter annual inflation announced 21 July is up to 4.1% with the quarterly change up 1.5%, fuel clearly being a major contributor. With that increase behind us it’s expected to ease once things settle down in the Middle East. Given the economy is continually evolving, let’s take a look at what might be considered an ideal economic position.
There isn't a single perfect formula, but economists generally agree there is a range where key economic measures work together to support steady growth, stable employment and confidence for households and businesses.
For New Zealand, the Reserve Bank aims to keep inflation between 1% and 3%, with around 2% considered the ideal level. At this point, prices are rising slowly enough that people's purchasing power isn't significantly reduced, while businesses still have confidence to invest and grow.
The Official Cash Rate (OCR), which influences borrowing costs throughout the economy, is often considered to be in a neutral position when it sits between 3% and 3.5%. At this level, it is neither strongly encouraging nor restricting economic activity.
That would generally translate into floating mortgage rates of around 5% to 6%, making home lending relatively affordable while still encouraging responsible borrowing. Savers would also benefit, with term deposits typically returning around 3.5% to 4.5%, providing a positive return once inflation is taken into account.
Other indicators also play an important role. A balanced economy would normally see GDP growth of around 2% to 3% each year and an unemployment rate close to 4%, suggesting most people who want work can find it while businesses can still attract staff.
When these conditions come together, the wider economy tends to benefit. House prices are more likely to grow steadily rather than boom or crash, businesses are more willing to invest, consumers can spend with confidence without taking on excessive debt, and investment markets generally become more stable and predictable.
The OCR is often described as the Reserve Bank's main economic control. When inflation rises too high, the Bank can increase the OCR to make borrowing more expensive and reduce spending. If inflation falls too low or the economy slows sharply, lowering the OCR helps encourage borrowing, investment and consumer spending.
While today's inflation figures show New Zealand is still working through global economic pressures, the economy continually moves through cycles. The Reserve Bank's role is to guide those cycles as smoothly as possible, aiming to bring inflation back towards its 2% target and keep the economy operating in a healthy, sustainable balance over the long term.
Importantly, we’re not far off it, scratch the surface, and we’re in a strong position to continue our recovery phase of the economic cycle.
Click here to the Stats NZ CPI report >>> https://www.stats.govt.nz/indicators/consumers-price-index-cpi/