Westpac chief economist says RBNZ may now not increase OCR until after June next year

Westpac chief economist Dominick Stephens now says the Reserve Bank may not increase the Official Cash Rate (OCR) until after next June, because of falling commodity prices and with inflation likely to be lower for longer.

Stephens' comments come after his counterpart at ANZ, Cameron Bagrie, suggested earlier in the week that the OCR may be on hold throughout 2015.

In his weekly video Stephens discusses volatility in global markets, noting the the price of oil has dropped from US$110 a barrel to below US$85 within a few months.

"Now to me the falling global price of oil actually makes this real. Talk is cheap, markets seem to panic all the time, but when businesses are really ready to sell oil at a lower price, it really does indicate that something is up with the state of global demand," Stephens said.

"There are a couple of important implications here for New Zealand. First of all as an exporter of food we're likely to experience a down-draft in the price of the things we sell to the rest of the world. That has already been spectacularly noticed in the dairy industry. But what you're likely to see from here is falling prices in, for example, meat products."

"The other implication of falling global commodity prices for New Zealand though is the low inflation dynamic we've been experiencing for some time could continue for longer," Stephens said.

Statistics New Zealand is due to release the third quarter Consumer Price Index (CPI) next Thursday morning (October 23). Stephens said Westpac's expecting the CPI will show inflation was 1.1% in the year to September 2014, and 0.4% in the September quarter.

"Things aren't really going to change much in the fourth quarter, indeed we think inflation will be just 1.3% over the whole of 2014," said Stephens.

"Now, with inflation that low it's really hard to see the Reserve Bank hiking the OCR again in early 2015. For some time our forecast has been that the OCR will remain at 3.5% until June next year. But look, with what's going on this week, and signs of lower inflation lasting a little bit longer, the risk is that the restart to OCR hikes gets pushed out beyond June."

Inflation in the year to June came in at 1.6%, and 0.3% for the June quarter. The Reserve Bank's September Monetary Policy Statement forecast 0.7% September quarter inflation, and 1.3% September year inflation.

Like their Westpac counterparts, ASB's economists also expect September year inflation of 1.1%. But they're sticking with their forecast for an OCR increase next March.

"We continue to expect the Reserve Bank will keep the OCR on hold until March 2015, before undertaking gradual tightening with an OCR peak of 4.5% expected to be reached in March 2016," ASB economist Christina Leung says.

The Reserve Bank Act is tasked with keeping the CPI at between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint. The Reserve Bank has increased the OCR four times this year, by a combined 100 basis points, to 3.5%. However, at its last OCR review on September 11 the central bank left the OCR unchanged.

The Reserve Bank next reviews the OCR on October 30.

Here's Westpac's full CPI preview and here's ASB's one.