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

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Inflation in the year to June came in at 1.6%, and 0.3% for the June quarter.
All statiscis NZ provide is an index. For the June quarter that was 1195.00000 versus 1192.00000 for the March quarter.
You can call that as a 0.3% increase but if we cut out some of the rounding it is more accurately 0.02517%.

Colin. Better to be approximately right than accurately wrong. Your calc should be 0.25167%. Dominick wins that round.   :)

David. I had a point to make in that the June quarter CPI increase was actually less than Statistics New Zealand's quoted 0.3% due to rounding. That was no criticism of Dominick. The error in decimal place I would have likely have corrected if you hadn't commented first.
I was well aware that the accurate answer is 0.2516779%. Please note that I was careful to specify "cut out some of the rounding" and say "more accurately".
I think you owe me an apology.

Not good news for those who need to inflate away their debt.

Which would be most National economies and councils with debt?. This low inflation of course means low returns also. Not good for most pension providers? hedge funds? futures markets? banks? OAPs? How do such "money managers" jsutify their fees when they provide mediocre returns? (Oh boy what a Q)
Then if deflation kicks in those owing money will see their incomes drop but the debt remain the same $, especially teh USA I suspect (think councils and states whose income is dependant on ever rising house prices).
Anyone with any sense should be petrified of deflation IMHO.

In real terms the debt goes up, while the returns from their business fall. Suddenly %4.5 at the bank starts to look attractive again, especially if you find yourself in a world where everyone has debt and no one has cash.
 Farming away paying %8.5  to the bank is easy when inflation is running at %9, when inflation is negative and you find yourself still paying %8.5, it becomes an impossibility very quickly.
 You rental investment earning %6 while you borrow at six with %8 inflation is not going to work when your asset is falling at %8pa

If you have cash then yes, sort of. But how many people (OAPs) have large lump sums they have invested v the ones like me who would have monthly pensions as an incoming stream? Also how long does 4.5% last if with deflation no one is buying anything? (and hence no one is borrowing to invest?   hello 1% on your deposit account?

But i'm better off than I was in a high inflation environment, and I can spend a little capital if I need to, also there should be some good pickings for savers.
 In fact with one eye on the OBR I wouldn't want to be in cash for long.

Charles Hugh Smith today is probably relevant:
The state has become dependent on the wages and profits of finance for its own revenues.

But they keep telling me that the State has unlimited chequebook, why do they need revenues?

Perception management. It looks so much better in terms of being 'sound managers of the economy' if you can claim to have a surplus. Even if it is all smoke and mirrors. And it will be  someone else's fault when you miss.

And whose job is it to counter such propoganda?

Steven is correct in his observation about rates but incorrect about their impact on investor wealth. Nominal yields/rates (the ones you see) = expected inflation  + real yield.  If expected inflation falls (deflationary) you can expect nominal yields to fall too. Investors should be indifferent to whether nominal yields fall but very sensitive to if real yields fall (forgive me I am ignoring the complexity of taxation here). However of course as a retiree, a deflationary environment is probably better for you than if we have a dose of higher inflation, the purchasing power of your pension increases, particularly if real yields remain unchanged (and you are conservatively invested!).

You assume the pension funds can pay.
Lots of US public funds are in danger of not....to say the least.

and what was Dominic predicting would be the CPI today 1 or 2 years ago?   wasnt he screaming fix fix! FIX!
Really its 0.25%, or that "rounding error"  to 0.3% is 17% off, quite a number.
BTW what was the last few quarters rolling averages? about the same? slightly higher indicating a slowing of our rockstar economy?
So just why did we see OCR rises?

Interest rates are obviously going to be lower and lower for longer.   With no inflation, then there is no ability to inflate farmer, householders, orchards, vineyards and businesses out of large debt by reducing the relative state of debt as pre GFC. 
Interest rates cannot rise until a global reset occurs.   

Govt tax take, 'lower for longer'.

Sweet! But what about the other 117 million homes (117,468,000) in the USA?

um, no.
Lots of reasons why I say this if you do the research you'll understand why.
Also converting elctrical power to H2 is at best a EROEI or 1 to 1 plus the cost of plant, many mnay billions.  Then there are the economic impacts of an EROEI of less than 8 to 1.
Consider that the entire oil industry and an EROEI of better than 10 to 1 and cost trillions to put in place.
Now consider that at EROEI of 1 to 1 H2 conversion needs to be 10fold in plant size and the capitial value and land area and time scale to do it is mindboggling.

What does it have to do with H2?

The process used is a thermal one.   The salt is liquidised/plasma and immensely hot, then they just use the hot to power standard turbine technology.  

doesn't have the overheating issue of PV panels or current loss from small generation density.

To convert the solar electricity to transport power we have only 2 choices mainstream choices seperate out H2 or batteries.

there's still conversion losses, but the technology is developed, and related to salt-steam turbines on nuclear plants.  The beauty of it is that the electrical side is energy dense and therefore more efficient.  
 In PV there needs to be good quality light, heat is the enemy, and then you have to transmit the electrical gains to a central point.  The conversion is more efficient, but the line losses and wiring cost greater - and as mentioned a single cloud can cause whole areas of panel to suddenly drop in watt output  (no short term storage).

PV is much better for distributed loads.

Nope....still need to convert electrical power to transport power. 

cars = oil not electrical power.
plus something called EROEI.

Oil fell from $148USD in July 2008 to $35, and rebounded to $80 eventually.
so your point is?
apart from showing you have not researched this what so ever...
Just think what your property investments will be worth after a decade or so of deflation and economic depression, think 1930s.

61km? that's enough for me to get to Palmerston North from home, and if I don't actually go into town, then _almost_ home again. lol

You really dont understand what so ever.
Chevy lasts for how many years compared to a conventional car? about 1/2.  Its cost compared to a convetntionalcar? about x2.
How many ppl do you think will be able to afford a $40kNZ EV? and be prepared to throw it away inside of 12 years?
Then there is all the other transport, agriculture etc thats needs cheap fossil fuels.

... obviously you've missed a few Top Gear episodes ... more than a few ...
Chevy's on average last 4 X that of a " conventional car " ... and it follows ..
" Its cost compared to a convetntionalcar? about x0.25. "

GBH, I always go to the ultimate, pre-Interwebs source of wisdom for car stuff:  Taxi drivers.
I've travelled in Gaia knows how many Priuses (Priua?  Priuex?) and make a point of asking two questions.

  • Current mileage
  • Battery replaced (or some cells)?

Most drivers are now around the 400-600K km's mark.
Not a single one has had a battery replacement.
Now, yes Priuex are a hybrid.  But that's still a fairly impressive record.
Nothing like actual field reporting, eh?

New std car = 20k, new prius $45K, so extra cost to finance x2?

Oh dear cherry picking again, Taxi is a bit of a specialist case.
As is a Prius, for instance a MiEV is 100% battery.
For a Prius lets look at some "real stats" then maybe,
"If the battery pack in your Toyota Prius dies before the end of its 150,000 (or 100,000) mile warranty, Toyota will replace it free of charge. But if your car is out of warranty, you join the 500 or so owners every month experiencing an expired nickel-metal-hydride battery pack."
"“People don’t get mad. They understand it’s a seven- or eight-year life cycle.”"
What is a 8~10 year car worth? on trademe its about $8kNZ (if that).
New battery pack? converting US $3kUSD to NZ and allow 50% add on for NZ charges = $5k plus fitting.
So are you really saying that you consider it economic to do a battery change?
Lets say you replace, so at 15yrears old a conventional car will be worth $3k, so spend over $5k on a battery for it?
ho hum.

Chevy's on average? well yes if your average is the 6litre highly under-stressed v8.   That I think was the claim on the hummer v Prius and published by Heartland? "institute".
Chevy themselves say the expected life of the battery in the Voltz is 10 to 12 years. 

steven... you persistently dismiss the impact and progress of the human spirt don't you.
The human spirit's capacity for reinvention will triumph over the 'miserabilists' such as yourself.

You ignore the math and laws of thermodynamics, choosing to pray that "human spirit" will let you live your life as you want to live it, Im betting on the former will force change.
So you stick your head in the sand and pray that this wont happen and someone else will fix it for you so you can continue to enjoy the fruits of your "work". While I on the other hand follow the math, but actually hope that the "human spirit" will make the best deal of whats available, its just not BAU.

What ray have horses got to do with it?
On the upside of the bell curve of energy, we always had more, cheaper and better. Once at the top we will always have less, more expensive  and maybe not better.

Math and energy laws do not get supeceeded/bypassed.
All better technology does is allow us to use more fossil fuel energy, whether that's efficient or not.
Carry on praying, you might want to get prone and not on your knees.

Cars run on hay?

It appears nzcoolie thinks so...or maybe its fresh air, not sure....

really,  get educated, I mean do I need to tell you about EROEI?
Ethanol typically uses a lot of fossil fuel based fertilizer to grow it and has at the end of the process an EROEI of around 1 to 1 if its lucky
In other words better to use fossil fuels directly.
Our modern economy/society needs a 8 to 1 ratio and not 1 to 1.

Actually I assumed nzcoolie was trying to point out the changes in technology. Horses and hay were replaced with combustion engines and fossil fuels. Maybe we're on the cusp of discovering something totally different? I hear a wee while ago in Switzerland they thought they had discovered time travel...

Peak oil is a simple mathematical fact if you understandwe are on a finite planet.  Unless you are still back in the 1400s and think the world is flat?
Good luck with that one.

... just keep burning coal then , there's a 250 year known supply of that ...
Little Johnny ought to have made the Gummster Minister of Energy ....
... so easy peasy to solve these pesky little problems ...
Now , how to cure ebola ? ..... gimmee 5 minutes ....

So why isnt interest rates dropping, farmers just lost 6 Billion dollars, and more before Xmas. This is exactly why the great economy is such a con job, and the REserve bank drags the everyone else into the hole. The reserve bank is causing inflation, not costs at the farmers gate. The NZ consumer is heavily subidising the export market while we get the non export rubbish. Tourists would be better off staying at home to sample NZs best food.

... farmers did not lose $ 6 billion at all ... dairy prices dropped precipitously from an exhuberant high , and those farmers did not lock in those stellar prices with forward contracts ...
The NZ consumer is subsidising nothing ! .... stop talking nonsense .. .. we get export grade food locally ... apart from Pam's bagged carrots , lettuce avoid them ...

Indeed.  Schiller had it nailed coupla centuries ago:
"Against stupidity the very gods themselves contend in vain"

Gummy. Obviously you've never been anywhere near a commercial orchard. I assure you we do receive the dregs of the crop on the local market. I bet the buyers from the big wholesalers and supermarkets from Asia and Europe drive a hard bargain in price as well as quality

Exports quality produce is very carefully graded, only the best kiwifuit is sent overseas.
Gummy,  Its been in the Herald that Fonterra payouts are  6 Billion less in the last two months, how isnt this a loss, its a massive loss to the economy. If Fonterra had announced 4 Billion in payouts  the RB would be raising rates the very next day.

It's not a loss, and it's not a loss to the economy.

If you have 6 Billion invested, then it disappears...that's a loss.

You spend 10 Billion, get a 4 Billion return THAT's a 6 Billion loss.

Just more NZ Government style accounting at work.

It's a 6 Billion reduction in revenue, that is 6 Billion less for farm development, and 30-40 Billion less for the economy as a whole.  What it is not is "a loss"

Whens the last time you were down the local Pak'n'slave GBH?

When I shop with packers or growers they are usually  disgusted at all the supermarkets below the Bombays, apparently much of the fruit on sale to NZers is worse than what goes in the "pig bins"

Westpac only just worked out OCR will stay the same for longer - But given their track record who would trust a bank economist? More likely that the OCR will be slashed over the next 18 months!

I'm predicting interest rates will stay low for another 3-4 years.

The Q is why would they rise?  ie a recovering/expanding economy needs more fossil fuel to do so, if we have less fossil fuel it cannot grow and hence interest rates can never rise.
Outside of stupidity of the central bankers.

Gloom in Australia
OCR on hold at 2.5% for longer, or cuts 

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