All big five banks now forecasting rate cut after inflation expectations weaken

Tuesday, 12 November 2019

Expectations of future inflation have deflated again, though this time only slightly.

Westpac has changed its mind about Wednesday's interest rate decision for a second time, reverting to its original forecast for a 25 basis-point rate cut.

The change brings its forecast back into line with ASB, ANZ, BNZ and Kiwibank, which are also predicting a rate cut, though with different levels of enthusiasm and conviction.

Westpac made its second u-turn after the Reserve Bank released a survey of business managers' expectations of what the rate of inflation will be in a year's time.

The mean-average forecast edged down to 1.66 per cent, the Reserve Bank said.

That figure is down from 1.71 per cent when businesses were asked the same question three months ago.

This week's Reserve Bank decision is a 'nail-bitersays Westpac.

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The survey is one of the pieces of data that the Reserve Bank's monetary policy committee has considered important in the past when deciding how to set the Official Cash Rate (OCR).

Businesses have slightly increased their forecasts for economic growth, but their inflation forecasts may hold more sway.

Opinions among a broader range of commentators remain divided on whether the bank will or should cut the OCR, or leave the rate unchanged at 1 per cent, meaning Wednesday's decision remains no certainty.

The Reserve Bank said expectations of the inflation-rate two years-out, in 2021, had decreased from 1.86 per cent to 1.8 per cent.

Taken on its own, that sentiment could make it more likely the bank will cut the OCR.

However, the decline is far smaller than the 26 basis-point drop in the last survey that the bank cited as a factor in its decision to lop half-a-percent off the OCR in August.

Compared with last quarter, expectations for annual real GDP growth increased slightly, from 2.1 per cent to 2.14 per cent for one year ahead.

The survey also showed respondents' expectations for house price inflation over the coming year had increased significantly to 4.51 per cent, up from 2.71 per cent in the last survey.

One argument commonly cited against cutting the OCR further is that could spill out into higher house prices and other asset-price inflation.

Median-average inflation expectations were unchanged from three months ago, at 1.7 per cent and 1.8 per cent, over one and two years, respectively

Nevertheless, Westpac chief economist Dominick Stephens said the data was enough to make it update its OCR forecast.

'Our suspicion was that the survey would rebound, as the data is often volatile quarter to quarter,' he said.

'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.'

KiwiBank, which has been one of the more bullish backers of a further rate cut, also said the data supported its prognosis that the bank would cut again.

The survey suggested that the 'outsized 50bp cut back in August has failed to turn the inflation expectations dial', it said.

'This adds further weight to our view that the RBNZ should cut the OCR tomorrow to 75bps.

'Momentum in the New Zealand economy is fading, backed up by business confidence surveys' measure of firms' own activity outlook and last week's weaker labour market report,' it said.