Inflation in New Zealand decelerated less than forecast in Q2 as domestic prices remained high, indicating the central bank will need to stay watchful.

New Zealand’s annual inflation rate declined to 6% from 6.7% in Q1, according to Statistics New Zealand on Wednesday. Economists forecast 5.9%, whilst the Reserve Bank of New Zealand (RBNZ) expected 6.1%.

Furthermore, consumer prices rose 1.1% compared to the previous three months, surpassing the 0.9% average estimate.

Bloomberg reports that the central bank has completed its rate hiking cycle after increasing rates by 525 basis points since October 2021. This is the most aggressive tightening since the Official Cash Rate was brought in in 1999.

Although the country’s economy has stalled, the data out today signals it will take some time before inflation reverts to the bank’s target of between 1% and 3%.

“Domestic inflation remains high, sticky and is lagging the pullback we’ve seen in recent pricing surveys,” according to Kim Mundy, senior economist at ASB Bank in Auckland. “Sticky non-tradable inflation will keep the RBNZ on alert and of the view that monetary policy will need to remain restrictive for the foreseeable future, but we expect the RBNZ to remain on hold.”

Furthermore, non-tradable inflation fell to 6.6% from 6.8% but remained higher than the central bank’s forecast of 6.3%.

The New Zealand Dollar increased over a quarter of a US cent before edging down. At the time of writing, it bought 62.98 cents from a previous 62.86 cents. Investors increased bets there would be another central bank rate rise in 2023, yet a 25-basis point rise has not been fully priced in, according to swaps data.

ANZ and Westpac still predict another rate rise from the central bank this year, despite the fact it announced the cash rate had reached a peak at 5.5%.

“We see inflation declining rapidly over 2023 as last year’s price spikes reverse, and supply constraints unwind, especially in the labour market. The falling inflation rate should clear the way for the RBNZ to pivot to supporting growth with rate cuts as soon as 4Q2,” according to Bloomberg.