Inflation rise cuts chance of lower OCR

New Zealand inflation hit a higher-thanexpected 1.4 per cent over 2020, reinforcing market expectations that the Reserve Bank’s lowest-ever official cash rate (OCR) will fall no further.

The consensus of market forecasts was for a 1.1 per cent gain in the annual consumers price index. For the quarter, the CPI rose by 0.5 per cent, said Stats NZ.

The Reserve Bank is charged with trying to maintain annual inflation within a 1 to 3 per cent range, with a 2 per cent mid-point, while also aiming for maximum sustainable employment.

Kiwibank chief economist Jarod Kerr said the bank’s inflation and employment mandates were far from being met. “But the rampant advances in the housing market have surely taken a negative cash rate off the table,” he said in a commentary.

Kiwibank now expects the OCR to be left unchanged well into 2022. And a growing list of economists now believe the current rate of 0.25 per cent will be the low point, now the risk of deflation appears to be waning.

Westpac this week changed its OCR forecast and now expects the OCR to remain on hold at 0.25 per cent for the foreseeable future, having earlier expected it to drop to minus 0.25 per cent this year.

ASB said risks of higher inflation were accumulating, but the Reserve Bank was expected to maintain “highly stimulatory” settings until it was confident economic activity and the labour market had turned the corner.

“The diminished risk of deflation suggests that the OCR is unlikely to move lower from its current 0.25 per cent low,” ASB said.

“Our view is that the OCR is unlikely to move up in 2021, but the resilient tone of New Zealand data is a reminder that the OCR won’t stay at record lows forever,” it said.

Capital Economics said business surveys were already pointing to a renewed surge in inflation. “We think inflation will remain around current levels in the first quarter and rise strongly thereafter,” it said.