NZ Herald business editor at large

Economists: March rate cut now more likely

Westpac chief economist Dominick Stephens. File pic.
Westpac chief economist Dominick Stephens. File pic.

Bank economists say pressure is growing on the Reserve Bank to cut interest rates in March after the central bank's Survey of Expectations showed a sharp drop in anticipated inflation.

Expectations for the inflation rate in two years time fell from 1.83 per cent to 1.63 per cent, the lowest since 1994.

The expectation for inflation in one year fell to 1.09 per cent from 1.5 per cent.

The Survey of Expectations is conducted quarterly by Nielsen for the RBNZ.

Economists at Westpac and ASB have both interpreted the result as a sign the bank have to move sooner on rate cuts.

"While we have penciled in June and August for these cuts, today's result skews the risks to an earlier start," ASB's Jane Turner wrote.

"March is certainly still a live possibility for an OCR reduction," said Westpac's Dominick Stephens.

The Reserve Bank cut rates four times last year to the current low of 2.5 per cent.
It has a mandate to keep inflation near a two per cent target point.

Lower rates are seen as a way to stimulate inflation, which fell to just 0.1 per cent for 2015.
The bank has previously indicated it expects inflation to return towards the mid-point later this year.

But falling expectations were now calling that argument into question, Stephens said.

"Low inflation expectations may start to impact wage claims and price setting behaviour, in turn leading to even greater downward pressure."

The RBNZ would be "very uncomfortable" with the fall in 2-year inflation expectations in particular, Turner said.

"Slowing NZ economic growth, spare global capacity, continued falls in oil prices and softening global inflation all reinforces our view the RBNZ will need to provide further stimulus to ensure inflation returns comfortably within the target band."

- NZ Herald

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