New data released by the Reserve Bank (RBNZ) on Tuesday is being seen to strengthen the case for an Official Cash Rate (OCR) cut on Wednesday.
The RBNZ’s Survey of Expectations, conducted between October 16 and 22, reveals New Zealand business managers and professionals see inflation further declining.
Their inflation expectations for the year ahead fell from the previous quarter’s survey, from an average of 1.71% to 1.66%. Expectations for two years ahead dropped from 1.86% to 1.80%.
The RBNZ is tasked with using the OCR to ensure inflation is between 1% and 3%, and there is maximum sustainable employment.
The Survey of Expectations prompted Westpac economists to revert their November OCR forecast back to what it was a few weeks ago.
They no longer believe the RBNZ will keep the OCR on hold on Wednesday, and have re-joined the majority of bank economists who are picking a 25-point cut to 0.75%.
However they no longer believe the RBNZ will cut the OCR at all in 2020 and 2021, as house price rises will see the economy firm up.
Westpac chief economist Dominick Stephens said: “Last quarter, this survey revealed a drop in two-year ahead inflation expectations from 2.01% to 1.86%. The RBNZ cited that as one important factor in their decision to cut the OCR 50 basis points.
“Our suspicion was that the survey would rebound, as the data are often volatile quarter to quarter.
“The fact that expectations actually fell further will be quite concerning to the RBNZ, increasing the chance that they will cut the OCR tomorrow…
“Usually, information released one day before a Monetary Policy Statement (MPS) would be too late to affect the RBNZ’s decision, and therefore we would not normally change our call on the eve of an MPS.
“But today’s Survey of Expectations is different. The RBNZ receives the survey results well before they are released to the market, so today's numbers were known to the RBNZ early enough – they just weren’t known to anybody else.”
The NZ dollar was down about a half a cent against the US on Tuesday.
Kiwibank senior economist Jeremy Couchman likewise noted the downbeat data; providing this commentary: “The RBNZ has determined that past inflation has a more significant influence on price setting behaviour than forward looking inflation expectations.
“So monetary policy has to work harder today, to influence inflation tomorrow. Hence the 50bp cut in August was an attempt to lift people’s heads.
“In the weeks following the Aug MPS, RBNZ Governor Adrian Orr noted in an interview with the Australian Financial Review that a dominant domestic driver behind the MPC’s decision was inflation expectations. Inflation expectations were “…starting to decline and we [the MPC] didn't want to be behind that curve. We want to keep inflation expectations positive - near the mid-point of the band.”
“Today’s result suggests that the outsized 50bp cut back in August has failed to turn the inflation expectations dial. And this adds further weight to our view that the RBNZ should cut the OCR tomorrow to 75bps.
“Momentum in the NZ economy is fading, backed up by business confidence surveys’ measure of firm’s own activity outlook and last week’s weaker labour market report.”