Declining inflation likely to drive down OCR

A decline in inflation, via the consumer price index, is expected to weigh on New Zealand's...
A decline in inflation, via the consumer price index, is expected to weigh on New Zealand's economy, and price increases will include household contents.PHOTO: GETTY IMAGES
Analysts are picking a slight rise in the consumer price index during the March quarter will result in the annual inflation rate declining from 1.9% to 1.6%.

The decline has economists picking the Reserve Bank will make good on its outlook to cut the already record low interest-driving official cash rate in May, from 1.75%.

The Reserve Bank's target for inflation is midway between 1%-3%, and had been stubbornly below 2% for some time, fuelling speculation the RBNZ will cut the OCR to stimulate economic growth.

While banks are in a mortgage war and rates have fallen below 4% on many offers, there is not expected to be any further, immediate, downward pressure.

The sharp drop in fuel prices at the end of last year was "entirely responsible" for the slowing inflation rate, Westpac chief economist Michael Gordon said.

"A result in line or below expectations would support our forecast of an OCR cut in May," Mr Gordon said.

StatsNZ is due to release the inflation data on Wednesday, which Mr Gordon said would be "crucial" to Reserve Bank's decision making in its next monetary policy statement, due out on May 8.

`We expect the various `core' inflation measures to hold steady at close to, but just below, the 2% mid-point of the Reserve Bank's target range," Mr Gordon said.

If inflation for the March quarter came in at the expected 1.6%, Mr Gordon expected it to remain below 2% for the rest of the year.

ASB senior economist Mark Smith also expects annual inflation to decline to 1.6%.

"A lower OCR beckons and the Reserve Bank appears to be coming around to this view," he said.

He said the negative risks to the inflation outlook had grown in recent months.

"The New Zealand economy looks increasingly unlikely to be able to generate sufficient economic momentum that will be able to keep inflation comfortably within the 1%-3% consumer price index inflation band," he said.

He expects increases in food prices, apparel, accommodation, personal care, household contents and insurance.

He believed the Reserve Bank will grow increasingly concerned over the inflation outlook and will cut the OCR by 50 basis points during 2019.

"The exact timing on OCR moves remains fluid," he said.

Mr Smith said housing-related costs were expected to be a "key contributor" to price pressures.

"Seasonal increases in private dwelling rents and solid rises in construction costs and property maintenance services are expected," he said.

Over the medium term, the risks to the inflation outlook remain skewed towards negative, he said.

"Global growth is slowing, and this will weigh on the New Zealand economy," Mr Smith said.

The latest gross domestic product figures, confirmed the New Zealand economy had lost momentum over 2018 and the domestic growth outlook for 2019 now looked weaker.

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