KEY POINTS:
Reserve Bank Governor Alan Bollard is expected to unveil a second cut in the Official Cash Rate next week, but economists are keen to also see his thoughts on projected economic growth and inflation.
There is a consensus among economists and Reserve Bank watchers that Governor Alan Bollard will announce a cut in the Official Cash Rate (OCR)at 9 am next Thursday, September 11.
Deutsche Bank chief economist Darren Gibbs said that an announcement of a 25 basis point cut in the rate next week was "seen by many commentators (including us) as highly likely."
The market is likely to instead focus on the Reserve Bank's economic projections, that will be included in its Monetary Policy Statement, released at the same time.
The bank was likely to revise its growth outlook downwards, said Gibbs, which should also cause it to move its inflation outlook down.
Gibbs, in a research report published today, said he expected the bank to highlight the risk of a deeper economic downturn and the risk of "more persistent-than-expected inflation."
The bank cut the OCR by 25 basis points to 8 per cent at its last meeting July - an unexpected move.
When cutting the rate in July Bollard said: "Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further."
" The bank's key assumption in initiating this easing cycle is that the present period of below-trend growth will (a) lead to a marked reduction in pressures on industrial capacity and (b) that this will prevent wage and price setters from behaving in a way that would perpetuate the current headline inflation shock," said Gibbs.
Helped by a declining push from global commodity prices, the Reserve Bank is forecasting that "inflation will return comfortably inside the target band over the second half of the three-year forecast horizon".
In the past, said Gibbs, weaker growth has invariably been associated with falling inflation.
The Reserve Bank's own September quarterly survey released last month showed business managers expect inflation to be 3.6 per cent in a year - well up on its own 1 per cent to 3 per cent target range.
It found the average one-year-ahead inflation expectations for the Consumers Price Index were up 0.3 percentage points on the June quarter survey.
Expectations of an increase in inflation were particularly strong over the next two quarters. In the June quarter survey, respondents believed inflation would be up 0.7 per cent for the September quarter but that has now leaped to 1.1 per cent.
Actual CPI figures show inflation was 4 per cent in the year to June - up from 3.4 per cent in the year to March.
A high level of those surveyed continued to believe monetary conditions were tighter than neutral, although the percentage figure was down slightly from 89 per cent in the June quarter to 88 per cent.
ASB economist Jane Turner said last week the survey results would have limited implications for the official cash rate decision on September 11.
"It's likely the Reserve Bank were expecting a slight pick-up in inflation expectations in quarter three given the near-term cost pressures, but will be looking for inflation expectations to ease as headline inflation unwinds over the next year."
She said that while growth risks remained the focus of the Reserve Bank at the moment, it would also be keeping a close eye on inflation.
She said the survey was a timely reminder of the difficult balancing act the Reserve Bank must contend with.
Turner said she too believed the Reserve Bank would stick with its cautious approach to cutting the OCR, with a 25 point cut next week, with a series of such cuts concluding with a rate of 6.75 per cent next year.
There are two more OCR announcements due this year, on October 23 and December 4.
- HERALD ONLINE
