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The dollar rises sharply as inflation expectations increase, lessening the likelihood of an OCR cut next month

Currencies
The dollar rises sharply as inflation expectations increase, lessening the likelihood of an OCR cut next month

There was a sharp jump in the value of the New Zealand dollar following the release of the Reserve Bank's Survey of Inflation Expectations, which came in higher than expected.

The NZD jumped from 73.6 USc to 74.30 USc and from 92.33 AUc to 92.85 AUc following the release of the survey results, which showed that inflation is expected to be running at 1.85% in two years' time, up from 1.8% in the March survey. The one-year ahead view of annual CPI inflation has risen to 1.32%, from 1.11%.

That is likely to have caused financial market players to have concluded that the Reserve Bank is less likely to cut the OCR in the near future, increasing the chances it will keep the OCR on hold for longer.

"This is an important development for RBNZ watchers," Westpac chief economist Dominick Stephens said in a note after the survey results were released.

"The RBNZ has stated that it will keep the OCR on hold unless wage and price setting behaviour settles below the 2% target and the domestic economy cools, in which case it could reduce the OCR.

"Financial markets have begun leaning heavily towards OCR cuts actually occurring, on the basis that new regulations will cool the housing market and inflation expectations will drop away.

"Most economists, ourselves included, would have expected the Inflation Expectations Survey to drop away to around 1.6%, given that actual inflation has fallen so far."

Stephens said four key surveys of inflation expectations had broadly stabilised, and that called into question the idea that price setting behaviour would settle below the RBNZ's 2% target.

"On balance, arguments for OCR cuts based on the state of inflation expectation have been weakened,"  he said.

"We remain firmly of the view that a June OCR cut is unlikely. Whether the RBNZ cuts later in the year or not is a closer call, but at this stage our forecast is for no cut."

In her note on the survey results, ASB senior economist Jane Turner said they made an OCR cut less likely in June and that had lifted the New Zealand dollar, but she still expected rate cuts later in the year.

"Our two year ahead forecast for inflation is currently just 1.7% and given the subdued inflation outlook we continue to expect rate cuts from the RBNZ," she said.

"We expect two, 25 basis point cuts, in September and October respectively," she said.

Meanwhile, BNZ senior economist Craig Ebert said; "Have to say, we never thought we’d live to see the day when a decimal point change on the RBNZ inflation expectations variables would move NZD at least half a cent. But that’s what’s occurred. Tells you a lot about the market. They want to see the negative."

"We don’t see a compelling case for OCR reduction in the immediate term. However, a case for it might develop as the year progresses. We prefer to wait and see and we think the RBNZ will see the sense in this approach as well," Ebert added.

The RBNZ next reviews the OCR, currently at 3.50%, on June 11.

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34 Comments

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MortgageBelt, those cuts were covered here yesterday.

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OK, so does the analysis suggest banks anticipating a downwards trend?
Or is this competitive positioning for the moment?
And why are borrowers willing to pay break fees again?

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How else to drag forward financial property gains to the point that new taxation structures, including rising local body rates, will enforce dispossession for the financially vulnerable? The vultures will eventually buy the same from a bankrupted middle/working class cohort at cents on the dollar.

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Repeat comment from elsewhere; seems a relevant fit here:
The impact of the inflation expectations data on the markets is intriguing. I've just run a correlation of the expected 2 year inflation data from March 2000 to now, with the actual CPI data from March 2002 until now, they being the data that should match as I understand the survey. Microsoft excel suggests the data has a correlation of -16%, which is to say it is marginally less accurate than throwing darts at a dartboard with numbers 0-5 on it.
The average inaccuracy is 1.0%. The differences are equally negative or positive which suggests the respondents are no more or less likely to predict higher or lower than actuals, and I've no doubt they give it their best shot. It apparently is just a difficult thing to predict, to the point where you wonder at the usefulness of asking such a question.

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Fear not: - if the unadjusted data, or even the seasonally adjusted data sucks, what do you do? You "double" seasonally adjust it. Read more

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Interesting post.

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Less accurate and in the wrong direction! No surprises there.

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Amazing what financial markets will follow. Do you have the prediction from 2 years ago and did we meet that this month? I am guessing they predicted higher inflation than we now have and are still using the same flawed system to predict inflation in another 2 years.

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"at least a broken watch is right twice a day"

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The predictions are always up. Higher inflation, higher interest rates, more demand, more growth, higher GDP etc. only very recently are predictions flattening down. Very reluctantly and very late.
Any predictions for inflation rate for 2017?

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Whoa - hang on - asset price inflation forecasts have been rampant and fulfilled since GFC - much unearned income has been cornered by the underemployed. Unfortunately recent sovereign bond price dislocations have unhinged the unthinking, overconfident trend followers- including asset heavy central banks and their grasping, profit dependent treasury departments.

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Sure, Property and equity assets. What else?

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Bonds and their myriad derivatives - the mother lode of Keynesian interference related returns.

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There you go again letting you blinkers drop to show the true Austrian at heart "it was those damn Keynesians they did it". Got news for you mate the data pretty clearly shows that the fresh water school's predictions of the zero bound trap have held up unlike the wailing of "here comes hyper-inflation" for 7 years now. On top of that you can look 2 years out from now and see little sign of it, so close to a decade of being wrong.

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I careless about Austrians, I have just concentrated on basic realities underpinned by compound and simple interest calculations. A complete winner without the weight of any ideology - one just had to stand on the shoulders of central banks to forecast the horizon more clearly. But I know when the power of money printing will fail to bring future financial gains forward because there are too few greater fools left to unload upon since the NPVs are too great to bear.

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a) Govns buying as any other option is way worse, kindly brought to you by out of control markets. b) All the money is under-written by energy, of which there will be less in the future.

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If I was you, I would be more worried about the really high upfront inflation adjusted cost of finance to purchase obscenely overvalued assets precipitated by low interest rates in the first instance. Workers cannot afford to service such assets without the aid of inflation, just as the rentier class no longer wish to invest printed money for negative carry. Best to sit back and let the inflating value of unearned cash do it's job.

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Lots of collectibles like paintings, classic cars etc.

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Pffff - tiny markets no scope for size.

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All symptoms of lots of $s chasing any asset there might be a return on.

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The clever word in Stephen's comment is "underemployed" to my mind.

In a Marxian tradition - everything that has 'labour value' as the distinguishing factor in profitability is going down - and those aspects of capital accumulation that have no 'labour value' in the profitability equation are up.

Or in other words, if you have to employ labour to earn a living - you're dead meat - it's a race to the bottom. The underemployed capitalists rule.

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Just bear in mind that when we had a rice shortage a few years back and thailand stopped exporting for all their wealth the Japanese saw the writing on the wall when they only produce 36% of their own food.

Same with capitalists, the french revolution etc proved how soft their foundations can be.

---edit--- PS this is one of the reasons I so detest the TPPA/free trade agreements they force us to pay international prices or even not stop exports in difficult times.

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how can someone be "underemployed"?
That would indicate that they're not a free being to live their own life, and that someone owns them that they must slave for them to meet their slave quota of "employment".

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quick comment on way out door:
I'm a capitalist. The point of capitalism is personal freedom, not slavery.

I see the main role of modern government is to protect its people not enslave them.
To this end I see their role as preserving capitalism, and preventing Feudalism and the rise of Lords/Baronries. At the moment governments are doing the exact opposite of this, instead of stopping corporate giants oppressing people, the governments are doing their bidding, and are becoming the slavers. Much of this they do through bankers, through debt, through control of peoples' options.

I'm capitalist, through and through. That's why I have no money. What use is money to a capitalist? Money is useful to banks as a tool of enslavement.

Please ask yourselves; What is "Capital"? Where does it exist, how is it formed, how is it enriched, how does it contribute to a citizenrys' freedom.

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BONDS - very widely recognised as the biggest of all the financial bubbles - just a matter of time which no one has a handle on. But as they say about bankruptcy, when it does, it will happen slowly and then all of a sudden.

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Bonds have been in a 30+ year bull run.

What could possibly go wrong with them?

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Very true economist - and its now long overdue in terms of the very long term 60 year interest rate cycle, bottom to top & back ...its now closer to 35 years on the downside....but then again, we have had a artificial player in the market for all of that time, central banks, printing money and defying market forces by suppressing long term rates with bond buying - but for how long and what are the consequences when released?...all big questions for the over-leverage floating borrower

http://www.ritholtz.com/blog/2010/09/interest-rates-60-year-cycle/

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Oh lets move the goals posts shall we. Except the returns on the overly inflated assets ie the income off them has not gone up. That should scream over-valued in Caps. What is the real argument over over-valued assets? oh yet more "reasons" to put up interest rates, ignoring what that will do to the real economy. Yet more la la justifications for the inflation that never happened that was wailed about from the Austrians/Libertarians/right wing.

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Inflation (like all resultants of market force) is notoriously difficult to predict, so why would the RBNZ take the word of the man on the street? I suppose there is an argument that inflation expectations drive price-setting behaviour, but I don't think that's really true to the extent that this measure is very important - i.e. the drivers of inflation are far too complex to be forecast by, and alter the behaviour of, the average Joe (and by the average Joe, I mean anyone without a PhD in Economics or equivalent).

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""Massey University's David Tripe said there was scope for mortgage rates to continue to fall.
"Lending rates haven't gone down far enough yet to reflect the reduction in bank funding costs," Mr Tripe said"" NZHerald

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Others close to the foreign wholesale funding cauldron see signs of eurodollar funding strain causing a constant need to sell UST on yield down ticks. Read more

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Interesting the use of double quotations marks when referring to the "dollar". There's a message in that, I think.

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USD back down to 0.735. Har har har har.

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