Some comfort for RBNZ ahead of Wednesday’s OCR review

The RBNZ’s latest survey of expectations will give it some solace ahead of its OCR decision on Wednesday.

The survey has shown respondents expect inflation to be at 2.06% in two years’ time, down from 2.12% in the last quarterly survey.

However, expectations for inflation in one year have increased by 10 basis points from 2.05% to 2.15%.

For five years and 10 years’ ahead expectations dropped to 2.13% and 2.07% respectively.

The RBNZ’s remit is to keep inflation between 1-3% and on average respondents expect the OCR to be 3.77% by the end of next month and to fall to 3.23% by the end of the December quarter.

On the house price front, respondents have indicated they expect house price inflation in a year’s time to be 3.85% a rise of 81 basis points from 3.04% last quarter.

The mean two-year-ahead expectation for annual house price inflation was 4.56%, an increase of 39 basis points from 4.17% last quarter.

This will be of interest to mortgage holders, who have a combined $370 billion borrowed from all bank and non-bank sources in New Zealand.

While the RBNZ is expected to cut the OCR by 50 basis points on Wednesday, the major banks have been engaged in a home loan cutting war over the past few weeks and most of the drop in interest rates has already been factored into mortgage interest rates.

Other expectations

Expectations for the unemployment rate have softened over the next two years.

Unemployment is expected to drop by 14 basis points from 5.22% last quarter to 5.08% over the next year, while in two years it is expected to have dropped to 4.69%.

And wage growth expectations are gradually easing, with respondents expecting the average hourly wage rate, as measured by Stats NZ’s Quarterly Employment Survey for the private sector, to fall 32 basis points to 2.49% from 2.81% in the last quarter.

The mean two year ahead expectation for wages inflation dropped by 33% basis points from last quarter’s estimate of 3.16% to 2.83%.

Well anchored

Westpac senior economist Satish Ranchhod says the survey shows inflation expectations remain well anchored close to the 2% midpoint of the RBNZ’s target band.

“In the detail, expectations for the coming year have picked up slightly, following the sharp fall in the NZ dollar in recent weeks which is set to push imported inflation higher over the coming year.”

He says the survey will leave the RBNZ still feeling comfortable that pricing behaviour is well aligned with its medium-term target.

“That will be welcome news given the rapid changes in the global trade environment and NZ dollar, along with related uncertainty about the longer-term inflation outlook.” 

The bank’s economists are picking the RBNZ will deliver another 50bp cut at Wednesday’s policy meeting. Looking further ahead, Ranchhod expects the RBNZ will continue to cut the cash rate through the first half of this year, but at a more measured pace –25bp cuts in April and May.

Data for the quarter was obtained from 42 business leaders and professional forecasters, slightly up on the number who answered the survey last quarter.