Is the bottom in sight?
|How low will the RBNZ go? With inflation lingering below the target band for two years now, a rate cut is on the cards for November. However, the economic environment is changing. Domestic activity is strengthening and inflation is set to rise gradually over coming quarters. As a result, following the anticipated November cut, the RBNZ is likely to keep the Official Cash Rate on hold for some time. Nevertheless, the risks for the OCR are still to the downside.
We expect that the September quarter CPI figures (due for release on 18 October) will show that prices rose by only 0.2% over the past year.¹ That would mean that we've had two full years with inflation below the bottom of the RBNZ's target band.
With inflation lingering at low levels, and associated downside risk for inflation expectations, another cut in the OCR is on the cards for November. Consistent with this, a recent speech by RBNZ Assistant Governor McDermott's reiterated the Bank's earlier guidance "that further policy easing will be required to ensure that future inflation settles near the middle of the target range." This will take the OCR to a new record low of 1.75%.
But while a November rate cut is a near certainty, there is more of a question about whether the OCR will need to be cut even further. The RBNZ's last set of published forecasts from September straddled the line between one and two more OCR cuts, and the accompanying policy statement noted that the stance of policy would be dependent on the evolution of economic conditions. So how have things been shaping up?
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