Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson

The Reserve Bank looks likely to make life more difficult for Finance Minister Grant Robertson today.

The Bank yesterday released its survey of the inflation expectations of business managers and professionals for the December 2019 quarter, and the results show a further fall.

Trading bank economists, commenting in the survey, are predicting that will lead to further cuts in the Official Cash Rate (OCR) when Reserve Bank Governor Adrian Orr unveils his Monetary Policy Statement this afternoon.

With the trading banks predicting that Orr will cut the OCR by 25 basis points to take it to .75 per cent; the Bank is heading towards either zero or negative interest rates.

If he wants to avoid that situation, Robertson will need to re-examine Government spending, particularly the straitjacket which it has been contained within because of Labour’s Budget Sustainability Rules.

The Bank will present him with other problems too.

Lower interest rates mean higher house prices and respondents to the Bank’s survey are already expecting house prices to rise.

68.0% of respondents to the survey expected one year ahead house price inflation to be more than 3.0%.

Prices are expected to grow at 4.51% in one year’s time.


This is an increase from 2.71% reported in the previous quarter’s survey.

At the core of the survey are inflation expectations which for one year ahead have decreased since last quarter’s survey from a mean of 1.71% to 1.66%.

“Expectations for two years ahead decreased from 1.86% to 1.80%,” the Bank said in a statement.

And the respondents are also picking a drop in the OCR.

“The mean expectation for the end of quarter Official Cash Rate decreased from 1.32% to 0.79%.

“The one year ahead expectation decreased from 1.13% to 0.61%.”

Overall the respondents painted a picture of an economy that had stalled.

“Compared with last quarter, expectations for annual real GDP growth increased slightly from 2.10% to 2.14% for one year ahead,” the Bank said 

And they picked no falls in the unemployment rate and modest wage growth of around one per cent for the next two years.

That figure must concern the Finance Minister.

While the Reserve Bank Governor might hope that rate cuts will induce more spending and thus might start to push inflation up; the track record so far shows that the Nak is not having a big impact.

Kiwibank economists Jarrod Kerr and Jeremy Couchman said the release of the report was rather timely, ahead of today’s OCR decision.

“After years of good behaviour, Kiwi expectations of inflation have fallen worryingly below the RBNZ’s 2% inflation target midpoint,” they said.

“The RBNZ have determined that past inflation has a more significant influence on price-setting behaviour than forward-looking inflation expectations.

“So monetary policy has to work harder today, to influence inflation tomorrow.

“Hence, the 50 basis points cut in August, which  was an attempt to lift people’s heads.”

However, they said that yesterday’s survey result suggested that the outsized 50 basis points cut back in August has failed to turn the inflation expectations dial.

“And this adds further weight to our view that the RBNZ should cut the OCR to 75 basis points.

“Momentum in the NZ economy is fading, backed up by business confidence surveys’ measure of firms’ own activity outlook and last week’s weaker labour market report. “

ASB senior economist, Mark Smith, took a similar view.

“The Monetary Policy Committee (MPC) of the RBNZ would have had access to these figures when they were deliberating OCR settings,” he said.

“Sub-2% backdrop for short to medium-term inflation expectations and signs that economic growth is expected to remain sub-par provide the RBNZ with scope to move the OCR lower to provide additional support to the economy.

“We expect a 25 basis points cut to the OCR to be delivered tomorrow (to 0.75%).”

The goal for both the Bank and Robertson will be to get spending ticking over again.

A year ago, in his interim report on behalf of the Tax Working Group, the former Finance Minister, Sir Michael Cullen addressed this issue.

”The best mechanism to improve incomes for very low-income households, for example, will be to increase welfare transfers,” he said.

“If the intention is to improve incomes for certain groups of low-to-middle-income earners (such as full-time workers on the minimum wage), then changes to the personal income rates and-or thresholds will be more effective.”
But Robertson yesterday ignored the RBNZ survey and instead was defending existing wage policies.

“According to the Stats New Zealand data, 59 per cent of workers received an increase in salary and ordinary-time wage rates over the year to September,” he told Parliament.

“And the latest OECD data shows that New Zealand’s wage growth this year has outstripped the UK, the US, Japan, Germany, France, Italy, Spain, Denmark, Finland, Sweden, and the European Union average.

“This is yet another indication of the strength of the New Zealand economy compared to our international peers.

“Despite international headwinds and a slowing global economy, businesses are continuing to invest in their workers, meaning more money in the pockets of New Zealanders.”

Clearly, that last statement is now debatable, and the pressure is now surely going to go on Robertson to start spending.

We may get a better idea of what he intends to when he releases his Budget Policy Statement early next month.

In the meantime, the Reserve Bank looks set to have another go at trying to incite people to borrow and spend.