Interest rates predicted to drop amid slowing inflation, softening labour market

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On average, annual inflation is picked to slow to 3.22 percent in a year, from 3.6 percent in December.
Photo: RNZ / Alexander Robertson

Business leaders and forecasters expect inflation to continue to slow, amid a softening labour market, cooler wages, and anaemic growth, leading eventually to lower interest rates.

Some 38 business leaders and analysts responded to last month’s Reserve Bank quarterly survey of expectations, which feeds into its rate-setting decisions.

On average, annual inflation is picked to slow to 3.22 percent in a year, from 3.6 percent in December, while the more closely followed two-year inflation forecast was 2.5 percent, from 2.76 percent.

The results, although from a small sample, were seen as a positive for the RBNZ, which has been talking about stubborn domestic inflation pressures, and pushing back against suggestions of rate cuts sooner rather than later.

Westpac senior economist Satish Ranchhod said the RBNZ would take comfort from the survey.

“The RBNZ has been concerned that domestic inflation pressures remain ‘sticky,’ and expectations are a key part of that story – if businesses expect inflation to remain high, they are more likely to try and push through larger increases in prices.”

Respondents agreed the official cash rate (OCR) would remain at 5.5 percent in the near term but would be cut in the second half of the year.

The survey suggested economic growth of little more than 1 percent for the coming year, and barely higher in the year after, with the annual growth in wages falling to 3 percent, and modest expectations of house price rises.

ASB senior economist Mark Smith said the survey showed the RBNZ’s policy of rises in interest rates was working.

“Nonetheless, the job is not yet done, and we expect that the RBNZ will continue to talk tough to ensure wage and price setting behaviour is consistent with inflation remaining within the 1-3 percent target range on a sustained basis.”

The next OCR decision is on 28 February with most analysts expecting no change, but renewed threats of rate rises if inflation remains high.