Inflation pressure off - slightly

Pressure on the Reserve Bank to keep cutting the OCR has been alleviated by the results of the Bank’s latest inflation expectations survey.

Wednesday, November 2nd 2016, 4:05PM

by Miriam Bell

Both one and two-year ahead inflation expectations have increased slightly, according to the Reserve Bank’s quarterly survey.

Two-year ahead expectations have edged up to 1.68% from 1.65% in the September quarter, while one year expectations have moved up to 1.29% from 1.26% in the September quarter.

Quarterly inflation is expected to be 0.23% for the December quarter and it is expected to increase to 0.35% in the following quarter.

These figures imply there will be annual inflation of 0.98% and 1.17% for the years ending December 2016 and March 2017 respectively.

Westpac acting chief economist Michael Gordon said while there was only a slight change in the inflation expectations, today’s results suggest the Reserve Bank has avoided its worst case scenario.

The Reserve Bank had highlighted a decline in inflation expectations as a key risk, he said.

“Soft inflation expectations can feed into wage- and price-setting decisions, which can then make low inflation that much harder to dislodge.”

But the survey results mean inflation expectations have been fairly stable over the last few quarters, which indicates businesses are aware the low headline inflation rate is partly due to temporary factors.

Gordon said expectations still remain below what would be consistent with the inflation target midpoint of 2%, which suggests the Reserve Bank still has some work to do to reassert the credibility of its inflation target.

“Recent Reserve Bank comments have strongly hinted at another OCR cut at next Thursday’s Monetary Policy Statement, and today’s result will not be enough to dissuade them.”

ASB economist Kim Mundy agreed the Reserve Bank will be relieved by the survey results which show that inflation expectations have remained essentially steady in the December quarter.

The Reserve Bank will take comfort that two-year inflation expectations appear to have settled, she said.

“Despite inflation expectations being low and well-below the Reserve Bank’s 2% target, the Reserve Bank will be relieved inflation expectations have remained steady since the first quarter’s sharp drop.”

While the inflation outlook is getting a little brighter, inflation expectations remain near recent lows, Mundy said.

For this reason, ASB does not think today’s result will have changed the Reserve Bank’s near-term interest rate outlook.

“We continue to expect the Reserve Bank to cut the OCR to 1.75% next week,” Mundy said.

“However, the fact that inflation expectations have steadied, combined with signs that inflation bottomed out in the third quarter, suggests the Reserve Bank is unlikely to feel any additional pressure to cut the OCR below 1.75% at this point in time.”

Tags: interest rates OCR OCR forecasts RBNZ Reserve Bank