Further evidence OCR won't rise soon as inflation expectations fall

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Evidence suggesting rates won't rise any time soon continues to pile up.

Tuesday, May 22nd 2012, 5:08PM

by Jenny Ruth

The latest indicator is businesses' inflation expectations fell for a fourth successive quarter as expectations of growth also deteriorated, according to the Reserve Bank's latest survey.

The survey outcome reinforces the likelihood that the central bank will keep interest rates on hold for an extended period - some aren't ruling out the chance of a near-term cut if news from the Eurozone worsens, but most expect the next move to be a rise in the official cash rate (OCR) in March or June next year.

"Over the past few weeks, economic developments would have led most to lower their growth expectations," says Jane Turner, an economist at ASB Bank. These developments include the sharp fall in commodity prices and "the stubbornly elevated level of unemployment," she says.

Turner notes the survey was conducted before Greece's failure to form a government and the growing prospect it will reject its bailout terms exacerbated concerns about the global economic outlook.

Two-year-ahead expectations of annual inflation now stands at 2.41%, down from 2.5% in the last survey in February while mean one-year ahead expectations fell an even greater amount to 2% from 2.24%. Actual inflation in the year ended March was 1.6%.

Michael Gordon, an economist at Westpac, says there's a divergence between private forecasters expectations and the central bank's forecasts, the latter expecting sub-2% outcomes for the next couple of years.

"If inflation is above 2% a year from now, that would be very much a challenge to the Reserve Bank," Gordon says.

Craig Ebert, an economist at Bank of New Zealand, agrees, saying even though inflation expectations have dropped they're still in the top part of the central bank's zero to 3% range.

"This is probably the most credible measure (of inflation expectations) out there. If it's still stuck in the middle of the top half of the bank, it doesn't give you a lot of room to move. It doesn't give you a lot of scope to juice the economy up," Ebert says.

Even though Ebert sees a risk of a near-term OCR cut, "the (Reserve) bank should be very careful about putting in turbo-charged stimulus."

The latest quarterly survey of business managers was conducted for the central bank by the Nielsen Company on May 9 and 10.

 

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