NZ: Further fall in inflation expectations to concern the RBNZ – Westpac

According to Dominick Stephens, chief economist at Westpac, New Zealand’s further decline in inflation expectations will concern the RBNZ and consequently they now expect an OCR cut tomorrow.

Key Quotes

“The RBNZ Survey of Expectations has revealed a further decline in inflation expectations. This alters the balance of available information ahead of tomorrow's OCR decision. Accordingly, we are reverting to forecasting an OCR cut tomorrow (previously on hold).”

“If the RBNZ does cut, we would expect no explicit signal of future follow-up cuts, similar to the May and August MPSs. We would expect the OCR forecast to be around 0.75%, again not signalling any intent to cut again. However, we would expect the RBNZ to remain open to the possibility of further cuts with a phrase like “There is scope for further fiscal and monetary easing if necessary.”

“We would also expect the RBNZ to try to rectify these flagging inflation expectations with something like the August phrase: “Our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range.”

“We continue to forecast that 0.75% will be the low in the OCR – rising house prices and an associated firming in the economy are expected to remove any reason to cut below that point. We are now forecasting no change in the OCR over 2020 and 2021.”