New Zealand’s expected inflation drops ahead of RBNZ rate decision

7:55 AM November 12, 2019

Summary:

  • 2-year expected inflation in New Zealand falls to the lowest since Q4 2016
  • RBNZ is likely to slash interest rates this evening to the lowest on record
  • Market-based expectations suggest a decision will not be a done deal

The New Zealand dollar is leading the losses this morning in the G10 basket after a RBNZ survey showed a drop in expected inflation over the next two years. The expected price growth dipped in the fourth quarter to 1.8% from 1.86% (the lowest since Q4 2016), while one-year inflation expectations declined to 1.66% from 1.71%, stressing difficulties in reaching a desirable level of price growth by the Reserve Bank of New Zealand. The survey also showed that subtly over 80% of respondents believe current monetary conditions are easier than neutral, a 2 percentage point increase compared to the data from the third quarter. Moreover, the survey showed that house price growth is likely to accelerate even faster than in the previous quarter. 

If these scenarios materialize, the RBNZ is likely to face conflicting signals as falling inflation should call for even more accommodative monetary policy while climbing house prices ought to suggest rather higher rates to stem building of a potential bubble there. Meanwhile, the RBNZ could cut rates this evening to the lowest on record (0.75%), a result seen as the most likely by 15 out of 21 economists surveyed by Bloomberg. Nevertheless, this move is not a done deal yet as the market-based probability points to 76% for a cut. That means elevated volatility in the kiwi currency pairs in the hours to come.

Two-year inflation expectations in New Zealand dropped in the fourth quarter, signalling downward price pressure in the economy. Source: Bloomberg

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