Will OCR change next week?

The Reserve Bank is expected to leave the official cash rate at 1.75% next week and continue projecting very little increase for the next three years because inflation has slowed in an economy that’s has been on a faster than expected track, BusinessDesk reports.

The Monetary Policy Statement next Thursday will provide a new set of forecasts and adjusted are expected because both the currency and inflation aren’t where the central bank was expecting back in November and Stats NZ has recalculated its measure of gross domestic product for the 2016 and 2017 March years.

The Reserve Bank will also have to consider the deflationary impact of free first-year tertiary education.

Fourth-quarter inflation of 0.1% was a third of the pace the bank forecast in November and the annual rate slipped back to 1.6%, a bigger drop than it expected.

The November MPS didn’t price in a 25 basis point hike until March 2020 and on that basis the RBNZ could be overtaken by the Federal Reserve this year after chair Janet Yellen repeated there would be gradual increases in the federal funds rate, currently in a target range of 1.25% to 1.50%.

The trade-weighted index was recently at 75.02, above the 73.5 level that the RBNZprojected for the first quarter.

Weaker inflation, the higher kiwi and the impact of the government’s tertiary education policies “are likely to see headline inflation retreat towards the lower end of the target band once again,” said ANZ New Zealand senior economist Phil Borkin in a note.

“The RBNZ will be mindful of the potential implications of this for the formation of inflation expectations.”

The ANZ Roy Morgan consumer confidence survey published today shows Kiwis wound back their expectations for inflation in the next two years.

The survey showed a net 3.2% general increase in prices is expected, down from a 3.5% rise seen in the previous month’s survey.

National house price expectations rose to 2.9% from 2.4%.

Source