OCR heading to 2%: ASB CPI preview

Tuesday 14th April 2009

The official cash rate (OCR) should drop 50 basis points to 2.5% on April 30, with another 50 to go before bottoming out at 2%, says the ASB's chief economist, Nick Tuffley.

The only blots on the inflation landscape in the very short term are power prices and local body rates, he says in the Auckland bank's prediction for this Thursday's Consumers Price Index announcement for the first quarter of 2009.

Assisted particularly by the dramatic fall in international oil prices in late 2008, all other inflationary indicators look weak, Tuffley says.

Supply constraints in the economy are all dropping fast, and will push annual inflation close to 1% within a year.

For the three months to March 2009, the ASB is forecasting annual inflation of 3.1%, and quarterly inflation of 0.4%. and a further OCR cut was now "prudent for April".

The ASB's forecsasts match those of the Reserve Bank of New Zealand in its March 12 Monetary Policy Statement, which cut the OCR by 50 basis points to 3%. That was a smaller cut than many market commentators had anticipated, albeit part of a precipitous slide from 8.25% just nine months ago, in June 2008.

That plunge is mirrored in sharply weakening pricing intentions, capacity use, and the easiest conditions for finding staff since 1991, when unemployment hit 11%, according to pulse-taking by the New Zealand Institute of Economic Research.

"Wage increases will be muted, as will be the pricing ability of businesses," says Tuffnell, with a weaker than hoped for recovery being the biggest thing the RBNZ should worry about.

"The sooner rates are dropped the better in our view: we now expect a 50 basis points cut on April 30 and a 2% end-point for the OCR."

Not that we are immune to price increases. In the quarter just past, plenty of the little things got more expensive.

Groceries, meals out, alcohol, electricity, gas and home maintenance costs all rose or remained stubbornly high in the first three months of this year, while the annual ever upward impact of new school and university fees was also felt by those who pay them.

By Jonathan Underhill

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