Waiting for inflation

Wednesday, 11 February 2015, 3:24 pm
Press Release: ASB Bank

Media release
ASB Quarterly Economic Forecasts February 2015

Waiting for inflation

• Solid economic outlook to be supported by employment growth, relatively low interest rates and net migration.
• Key risks to growth lie in the export outlook; including dry conditions, low dairy prices and soft Chinese demand.
• Plunging oil prices have changed the inflation outlook dramatically, OCR to remain on hold for the foreseeable future.

New Zealand looks set for a year of solid overall economic growth of around 3%, driven largely by consumer spending, according to the latest ASB Quarterly Economic Forecasts.

ASB Chief Economist Nick Tuffley says record- level net migration means more people are being fed and clothed. Employment growth is solid and interest rates are likely to remain relatively low, supporting growth.

Lower petrol prices will also boost household purchasing power. “As a net energy importer, New Zealand is very much a winner out of the recent plunge in oil price,” Mr Tuffley says.

But there are risks to be mindful of. “New Zealand’s main economic challenges lie on the export front. Dry conditions are starting to bite in a number of regions around the country. Dairy prices are still low, but are showing early signs of gradual recovery,” Mr Tuffley says.

New Zealand’s inflation outlook has changed dramatically in a relatively short space of time. Plunging oil prices mean the annual inflation rate will fall close to zero in early 2015. “Normally, changing oil prices wouldn’t influence the RBNZ’s actions much, but in this case inflation has already been very subdued for a long period.”

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ASB’s economists now expect the RBNZ to keep the OCR on hold for the ‘foreseeable future’, or at least 2015 and 2016. “OCR increases are effectively off the table for a long time. The risk over the next 6 months or so has swung towards OCR cuts being a possibility,” says Mr Tuffley.

Meanwhile, global risks, combined with the plunge in oil prices, have pushed down interest rates around the world. “In time, though, interest rates, globally and in New Zealand, will go up,” Mr Tuffley says. “In a more ‘normal’ world, free of the current monetary distortions, the New Zealand dollar would be sustainably lower than it is now, and the OCR would likely move up nearer a more neutral rate. But that is still some time away.”
ENDS

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