(Bloomberg) — New Zealand’s annual inflation rate fell sharply in the third quarter, returning to the central bank’s target band for the first time in more than three years.

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The rate fell to 2.2% from 3.3% in the second quarter, Statistics New Zealand said Wednesday in Wellington. The result matched economists’ expectations while the Reserve Bank had forecast 2.3%. Consumer prices advanced 0.6% from three months earlier, less than the 0.7% estimate of economists.

The RBNZ began an easing cycle in August with a 25 basis-point cut to the Official Cash Rate and stepped up the pace last week, lowering it by 50 points to 4.75%. With inflation slowing markedly and the economy likely back in recession, policymakers are expected to deliver another big cut at their final meeting of the year on Nov. 27.

“Pricing pressures have cooled appreciably and there is the risk of inflation settling below 2%,” said Mark Smith, senior economist at ASB Bank in Auckland. “A 50 basis-point cut in November followed by a sequence of 25-point cuts and a 3.25% OCR endpoint is our base case scenario, but risks are tilted to more front-loaded policy easing.”

The New Zealand dollar fell after the report, buying 60.69 US cents at 11:21 a.m. in Wellington, down from 60.90 cents beforehand. Traders now see a 45% chance that the RBNZ could cut the OCR by 75 basis points next month, swaps data show.

Domestic Prices

The RBNZ aims to keep inflation around the 2% midpoint of its 1-3% target band. Inflation, which peaked at 7.3% in 2022, was last inside the band in the first quarter of 2021.

Much of the decline in the annual rate has been driven by imported or so-called tradables prices. They fell 1.6% from a year earlier, the first annual decline since late 2020.

Annual non-tradables inflation, a closely watched indicator of domestic price pressures, slowed to 4.9% in the third quarter from 5.4% in the second, today’s report showed. The RBNZ tipped 5.1% in its August projections.

Rents and council rates were the largest contributors to the annual inflation rate, the statistics agency said. Insurance costs jumped 12.9% in the year.

“Domestic inflation is still elevated, and not just because of items like council rates,” said Satish Ranchhod, senior economist at Westpac in Auckland. “That ‘stickiness’ in domestic prices will be important for how far and fast inflation eases, especially with interest rates now moving down.”

Other Details

• Non-tradables prices increased 1.3% in the quarter, matching economists’ median forecast

• Tradables prices fell 0.2% in the quarter; economists expected a 0.1% decline

• Fuel prices fell 8% in the year while airfares also declined

(Updates with economist comments)

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