Westpac said the Reserve Bank of New Zealand is unlikely to cut its official cash rate, or OCR, in June following the release of the results of the survey of inflation expectations by the bank.
In a research report released Tuesday, Westpac noted that the RBNZ’s Survey of Expectations recorded a slight increase in expected inflation in two years’ time, to 1.85 percent from 1.80 percent. The bank has stated that it would keep the OCR on hold unless wage and price setting behavior settled below the 2 percent target and the domestic economy cooled, in which case it could reduce the OCR.
“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,” said Dominick Stephens, Chief Economist at Wespac New Zealand.
The economist said financial markets have begun leaning heavily towards OCR cuts actually occurring on expectations that new regulations will cool the housing market and inflation expectations will drop away.
The four key surveys of inflation expectations have broadly stabilized: The RBNZ two-year ahead survey rose to 1.85 percent from 1.8 percent; The Marketscope survey of household expectations showed that inflation 1-year ahead fell to 2.4 percent from 2.6 percent, but inflation five years ahead rose to 3.6 percent from 3.4 percent.
The AON-Hewitt survey of economists’ expectations for inflation in four years’ time was stable at 2.1 percent; and The ANZBO survey of businesses’ expectations of inflation in one year’s time was stable at 1.8 percent.
“These survey results cast into question the notion of wage and price setting behavior settling below the RBNZ’s 2 percent target. True, some measures remain weak, including recent data showing that labor costs rose only 1.7 percent in the year to March 2015. But on balance, arguments for OCR cuts based on the state of inflation expectations have been weakened,” said Stephens.
The material has been provided by InstaForex Company – www.instaforex.com