In a week which had potential for cataclysmic market volatility, the outcome was rather muted. Indeed, Trump’s inauguration made headlines near and far. But the overall market reaction was tamer than anticipated. Largely because of the absence, or rather delay, of tariffs. Yes, the discourse for Trump’s tariffs remains alive and well. And several countries, from China to Colombia, are on his radar. But he hasn’t pulled the trigger yet, and even watered down his plans. Good news for us, Trump has gone from considering a 10% tariff on China to saying he’d “rather not” have to use tariffs on China. Of course, uncertainty remains with negotiations and threats hanging in the air. Markets survived week 1 of Trump 2.0 relatively unscathed. But we’re still in a period of noise and volatility as he settles back into the Oval Office.

Moving our thoughts to home, we’re thinking about the current state of the Kiwi economy in three periods (or phases). The first period was the recession, that started in 2022 and snowballed into 2024. The recession was much deeper than most had forecast (especially the RBNZ). And we believe the recession ended in the last months of 2024. So here we are, entering the most difficult phase, or period. With most businesses able to “survive into ‘25”, we’re expecting an uplift in mindset. Confidence has improved, but activity is still depressed. This current phase is most important. The battered economy needs to rebalance… we need to redefine risk, and we need to reengineer our growth aspirations. Falling interest rates and a steady uplift in forecast activity should become self-fulfilling. We think the rebalancing will take 6 months (plus). But that leads us to the “thrive in ‘25” phase. We’re all hanging out for this. Growth should accelerate over the second half of 2025 as the full force of lower interest rates, plus an expected uplift in global growth, feed through. The key metrics for this year are coming from the NZIER’s survey of business opinion. We’re watching businesses’ intentions to invest and hire. If we get more activity, with stable inflation, profitability will improve, and businesses will start to invest again. And that’s real growth. That’s the good stuff. That’s what we’re looking for. (Read more on our 2025 outlook)

And we’ve already got part of the equation solved. Inflation is stabilising. Over the December quarter, consumer prices rose 0.5%, leaving the annual rate unchanged at 2.2%. With each release, we grow in confidence that inflation is becoming well contained. It took some time (2½ years), but the beast is finally back in its cave. (See our full review).

Deflation pressures are becoming more broad-based. There were more goods and services recording a decline in price over the quarter. 251 items in (or almost 40% of) the CPI basket recorded price decreases – the most since 2020, or 2017 excluding covid. At the same time, there were fewer goods and services recording price hikes. In fact, for the first time since the end of 2020, just under half of the basket recorded a price increase. And in even better news – the underlying trend in consumer prices continues to cool. The various measures of core inflation confirmed as much. Stripping out the volatile price movements in food and fuel, annual core inflation is down to 3% from 3.1%

Looking at the CPI report card, there's enough disinflation in the data to support further rate cuts from the RBNZ. And a 50bp cut to 3.75% in February is pretty much a done deal. We'll then see, most likely, another cut to 3.5% in April (or May). It's the next move(s) below 3.5% that's in question. The RBNZ is signalling a pause at 3.5%... a long pause... We believe more needs to be done to stimulate the recovery into 2026 and beyond. We believe the inflation problem is no more. We believe households and businesses need rate relief. And we believe the RBNZ will be forced (once again) to deliver more, not less.

Financial Markets

The comments below were provided by Kiwibank traders. Trader comments may not reflect the view of the research team.

In rates, Kiwi yields end the week lower.

“Kiwi swap yields ended the week 8bps lower across the curve. After initially dropping 5bps, the remainder of the week was a slow consolidation lower. Firstly, there was relief that Trump’s tariff policies, so far, remain up for negotiation. Locally, the downward trend was reinforced by a CPI print in line with both market and RBNZ expectations. This saw the market quickly move back to pricing close to a full 50bps cut. However, pricing for the terminal rate remains on the higher end of RBNZ’s estimate of neutral at around 3.15%. Likely a head nod to risks from a lower currency and higher oil prices that could see inflation rebounding back above the 2% midpoint.

The local market remains braced for a pay side flow driven shift by mortgage borrowers into longer tenors. Last week saw the first rumblings of this as one bank sharply lowered their 2-year home loan special. Though with the February OCR meeting now in view, this rate is still probably a bit too high to turn the heads of many borrowers away from 6 months or 1 year. Conter-intuitively, the popularity of shorter tenors has seen the average rate paid by borrowers only fall slightly from the peak slowing the transmission of easing delivered so far.

A more cautious stance from central banks will see more measured moves this week. FOMC is widely expected to keep their policy rate unchanged while Canada and ECB are expected to cut by 25bps. For antipodean rates Australian CPI is the major data release to watch for. And on the subject of neutral rates, we will hear from Paul Conway this week, delivering a speech on long term growth and neutral rates.” Matthew Crowder, Balance Sheet Manager – Treasury.

In currencies, Trump 2.0 brings less volatility than we initially expected (so far…).

“The Kiwi dollar opened last week at 0.5590 and traded fairly quickly up to the 0.5680 level. Some tough talk from Trump then saw the Kiwi head to a low of 0.5620, as Trump announced his tariff plans for Canada and Mexico. This was on the Tuesday, or Day 1 of Trump 2.0. From there it was a relatively smooth week for currency markets, as it became a little clearer that Trump would not initially be making any quick decisions around what to do with China, allowing time for potential negotiation. While this means that perhaps China will have more of an opportunity to negotiate, it could also be yet another tactic from Trump on his own: keep them guessing. The World Economic Forum summit in Davos last week also provided a little sense amongst the noise for market participants. We are certainly not out of the woods yet, but it was less volatile in currency markets than it might have been. This week we hear from the Federal Reserve, who may not necessarily deliver a rate cut of 25bp. Fed officials still have reservations about the trajectory of inflation and concerns that it may tick higher. Also there is a lot of uncertainty with Trump and his tariffs, and its wider impacts on the global economy. Monday saw the US Dollar higher again, this time on the back of tariffs imposed on Colombia (which were then rescinded). At the moment the fortunes of the Kiwi dollar are very much dependent on what happens with the US Dollar. Our own inflation print last week had little impact on the Kiwi. The Fed this week certainly could throw a spanner in the works if they do run with another rate cut.” Mieneke Perniskie, Trader - Financial Markets.

Weekly Calendar

• Aussie CPI inflation is expected to fall close to the midpoint of the RBA's 2-3% target band. Annual inflation is expected to slow to 2.6% from 2.8% in the December quarter. Cost-of-living subsidies continue to help dampen inflation. But measures of core inflation suggest that there's more to the decline than just policy. Jobs data continues to be strong. But if the underlying trend in consumer prices eases by more than expected then it would strengthen the case for the RBA to cut rates in February.
• The US Federal Reserve is expected to hold rates steady at its January meeting, the first pause since the cutting cycle began in September last year. The no-change decision largely rests on the strong job growth in December and the fall in the unemployment rate. It may however be a dovish pause as recent inflation should bolster the Fed's confidence that inflation continues to fall closer to target.
• The ECB is also scheduled to meet this week and will likely lower its key policy rates by 25bps. Headline inflation is expected to fall below the ECB's 2% target, justifying the cut. The ECB is expected to cut around 100bps this year to take rates closer to the neutral nominal rate of around 2%. President Christine Lagarde will host a press conference which will be keenly watched for any clues on future decisions.

See our Weekly Calendar for more data releases and economic events this week.