Greased up

Global oil prices have plunged to a five-year low. This may prove to be a large but temporary dip. Nevertheless, the sheer scale of the recent drop in oil prices, and accompanying decline in petrol prices, will have a profound effect on the economy.

We’re now forecasting inflation to fall below the RBNZ’s 1 to 3% target band for most of the next year. And although the RBNZ looks through sharp changes in the prices of volatile items such as petrol, the recent declines come on top of a more generalised softness in inflation in recent years.

As a result of this soft inflation environment, we’ve pushed out our expectations for rate hikes. We now expect the RBNZ will delay hiking the OCR for the whole of 2015 (previously, we anticipated a September OCR hike). We are now forecasting four OCR hikes over 2016, and one in 2017, taking the OCR to a stunted peak of just 4.75%.

At its recent December interest rate announcement, the RBNZ kept rates on hold, but clarified that it is still thinking about eventual rate hikes, noting that ‘some further increase in the OCR is expected to be required at a later stage’. The reinsertion of this explicit tightening bias (which was removed at the time of the October announcement) came as a bit of a surprise to markets, and on the day was enough to push the NZD up strongly. However, this doesn’t mean that rate hikes are imminent, or that the eventual tightening cycle will be very pronounced. The RBNZ’s own forecasts showed only very gradual interest rate increases. Significantly, however, the RBNZ’s forecast were finalised in late-November, and will not have factored in the continued sharp declines in oil prices. As a result, conditions favour a later resumption of the tightening cycle than the RBNZ is assuming.