Westpac Institutional Bank Team
Westpac Institutional Bank
Markets are abuzz with the possibility that the RBNZ could cut the OCR at its upcoming policy announcement. While it’s a close decision, we don’t think that the case for cuts has been made, and expect that the OCR will remain on hold in June.
The RBNZ’s next policy announcement will be on June 11. The RBNZ has noted that they would consider OCR cuts if demand weakened, and if wage and price-setting outcomes settled at levels lower than is consistent with the inflation target. After weighing up the slew of developments in recent weeks, we don’t think the case for a rate cut has been made just yet.
Looking first at inflation, developments on this front have been borderline. It’s true that consumer price inflation is currently low. But in part, this is due to last year’s sharp declines in oil prices. The RBNZ is more concerned about where inflation will be in the future, the key to which is what’s happening to inflation expectations.
As we discuss in a recent article,1 there has been a downshift in inflation expectations in recent years. Notably, this isn’t just a response to the recent softness in oil prices. Inflation expectations shifted down several years ago, and the persistent weakness in actual inflation means that expectations have been under downwards pressure ever since.
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