Inflation concerns could mean June cut
Low inflation expectations are feeding OCR projections of a June cut, but it’s still possible other factors may edge that timing out.
Monday, May 23rd 2016, 12:07PM
by Miriam Bell
There’s just over two weeks until the Reserve Bank’s next OCR announcement on June 9 – and already speculation on what might happen has started.
The stage for predictions has been set by the release of a range of critical information.
This includes April’s housing market data, which showed strong price growth nationwide (including Auckland) and has renewed concerns about housing market risks.
Last week also saw the release of the Reserve Bank’s latest Household Inflation Expectations survey, which showed businesses expectations of inflation have increased slightly.
One year expectations lifted from 1.09% in the first quarter to 1.22% in the second quarter, while two year expectations edged up from 1.63% to 1.64% over the same period.
HSBC chief economist Paul Bloxham said this still remains well below the Reserve Bank’s inflation target of “near 2%”.
“We see this measure as low enough to still worry the Reserve Bank that inflation expectations are becoming embedded at a below-target rate.
These concerns about inflation expectations still being too low mean that HSBC expects the Reserve Bank will cut the OCR further in June, despite concerns over the strength of the Auckland housing market.
“Our central case is for a further cut in the Reserve Bank’s cash rate to 2.00% in June, and sees the central bank holding steady from there in subsequent quarters.”
Westpac is also forecasting that another OCR cut is on the cards soon.
The bank’s chief economist Dominick Stephens said that with inflation currently subdued and the NZ dollar holding up, they expect the Reserve Bank will cut the OCR again in June.
“However, after this a pause in the interest rate cycle is likely as firm GDP growth and a lift in oil prices drive some pick-up in inflation over 2017.”
Record low interest rates are currently helping to drive economic activity, Stephens said.
But they have also contributed to the re-emergence of a borrow-to-spend dynamic which has pushed debt-to-income levels above the peaks seen prior to the financial crisis, he warned.
Meanwhile, ASB is not as convinced the Reserve Bank will cut the OCR in June.
ASB chief economist Nick Tuffley said high Auckland house prices are a concern for the Reserve Bank – due to its financial stability mandate – and an argument against further interest rate cuts.
But, perhaps tugging the Reserve Bank in a different direction, are that its concerns about low inflation expectations have got a little larger, he said.
This is because while last week’s inflation expectation survey results were steady and didn’t fall further, other inflation expectations measures point to some softening in long-term inflation expectations.
Tuffley said that, given how spooked the Reserve Bank was back in March over falling inflation expectations, they believe ongoing concerns in this area will prompt an OCR cut in June.
“But a cut at that particular meeting is becoming more of a 50:50 proposition, and is muddied even further by the Federal Reserve June 15 meeting now looking ‘live’ for an interest rate hike.
“The Reserve Bank may hold fire in the hope the Fed does some work in pushing the NZD down, before it delivers the OCR cut its forecasts call for.”
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