Further decline in inflation expectations will concern the RBNZ, consequently we now expect an OCR cut tomorrow.
The RBNZ Survey of Expectations has revealed a further decline in inflation expectations. This alters the balance of available information ahead of tomorrow’s OCR decision. Accordingly, we are reverting to forecasting an OCR cut tomorrow (previously on hold).
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 Reserve Bank, increasing the chance that they will cut the OCR tomorrow.
On October 31 we predicted that the RBNZ would leave the OCR unchanged in November, although we regarded it as a close call. The RBNZ had not signalled a cut, and the information available up to that point did not justify the RBNZ changing course. But at the time we warned that two big pieces of information could yet cause us to change our call – labour market data and the inflation expectations survey. The detail of the labour data was weak, but not sufficiently so to change our call. But today’s expectations survey was clearly on the weak side. It now seems more likely that the RBNZ will cut the OCR tomorrow, although we still regard it as a close call.
Usually, information released one day before an 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 Reserve Bank receives the survey results well before they are released to the market, so today’s numbers were known to the Reserve Bank early enough – they just weren’t known to anybody else.
If the RBNZ does cut, we would expect no explicit signal of future follow-up cuts, similar to the May and August MPSs. We would expect the OCR forecast to be around 0.75%, again not signalling any intent to cut again. However, we would expect the RBNZ to remain open to the possibility of further cuts with a phrase like “There is scope for further fiscal and monetary easing if necessary.” We would also expect the RBNZ to try to rectify these flagging inflation expectations with something like the August phrase: “Our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range.”
We continue to forecast that 0.75% will be the low in the OCR – rising house prices and an associated firming in the economy are expected to remove any reason to cut below that point. We are now forecasting no change in the OCR over 2020 and 2021.
