Business Editor at Large Liam Dann explains the Official Cash Rate, and how the Reserve Bank sets the OCR to influence the economy.
A softening outlook for inflation has boosted expectations that the Reserve Bank will cut the official cash rate (OCR) below 1 per cent today.
A day before its final interest rate call of 2019 the Reserve Bank released its quarterly survey of expectations, which asks business managers about how they expect economic conditions to unfold over the next two years.
The most closely watched measure is expectations for inflation two years into the future, which dropped to 1.8 per cent in the latest survey.
The New Zealand dollar dropped by around a quarter of a cent against the US dollar on the news.
Although the drop in inflation expectations was not large, it comes three months after the Reserve Bank surprised markets with a 50 point interest rate cut in August.
Reserve Bank governor Adrian Orr cited the fall in expectations when announcing the cut, which was deeper than markets expected.
Inflation expectations have been dropping for more than a year, despite a series of OCR cuts.
Reserve Bank Governor Adrian Orr cited a slide in expectations for inflation when he announced the Reserve Bank was slashing interest rates in August. Inflation expectations have continued to fall. Photo / File
Because the Reserve Bank commissions the survey of expectations, the monetary policy will have had the information throughout its deliberations this week.
Jarrod Kerr, chief economist at Kiwibank, said the Reserve Bank would likely be concerned that even the deep cut had not been enough.
Kerr has argued that the Reserve Bank should cut the OCR to 0.75 per cent on Wednesday and said the latest data would make the decision easier.
"It's been a frustration for the bank for quite some time, and central banks around the world have really struggled to get their monetary policy to gain traction and generate growth and inflation," Kerr said.
"Here we are in New Zealand, with cooling growth and cooling inflation and expectations for both have come off and continue to fall."
In the days leading up to the decision, traders were divided over whether the Reserve Bank would cut interest rates again, with market pricing on Monday evening suggesting around a 60 per cent chance of a cut.
"The fact that expectations actually fell further will be quite concerning to the Reserve Bank," Stephens said last night. Westpac had expected inflation expectations to pick up.
Elsewhere, the survey showed a strong lift in expectations for house prices. Respondents predicted that over the next 12 months house prices will increase by 4.51 per cent, up from 2.71 per cent three months ago.
