Low inflation means Official Cash Rate cut likely


It is looking more and more likely that there will be an interest rate cut next month.

The markets are pricing in a 75 percent chance that the Reserve Bank will cut the Official Cash Rate by 0.25 percent on August 11th.

Just a week ago the chances were more like 40 percent.

A rate cut of 0.25 percent would take the OCR to a new low of two percent.

Lower rates are good news if you are borrowing money, but not so good if you are trying to save.

The odds of another rate cut rose after yesterday's release of the latest Consumers Price Index. The CPI increased by a weaker than expected 0.4 percent. The RBNZ had expected a rise of 0.6 percent. and economists had predicted 0.5 percent.

Inflation remains stubbornly below the RBNZ's target range of between one and three percent.

Petrol rose by 5.3 percent and construction costs went up by 2.1 percent in the three months to June.

Domestic airfares fell by 9.9 percent. So too did rental cars.

Accommodation services fell by 6.8 percent and package holidays were down by 6.8 percent.

Meat prices were down 2.7 percent.

The prospects of a rate cut saw the New Zealand dollar lose ground.

It was trading at 71.10 US cents at 6am Tuesday.

The Kiwi was sitting at 93.60 Australian cents and 53.59 British pence.

The Kiwi has lost two percent in value since Thursday, but it is still higher than the Reserve Bank predicted or would like.

So with the dollar strong and inflation weak the markets are increasingly convinced there will be an interest rate cut.

There is also the prospect of another rate cut later in the year. That could take the OCR to 1.75 percent.

Although economists generally believe a rate cut is likely that does not mean they all agree it is a good idea.

ANZ Chief Economist Cameron Bagrie says "We still believe that in a backdrop of a strong domestic economy, growing capacity pressures and broadening housing and credit largesse, cutting the OCR again is not without risks."

"However, given low headline inflation, already soft inflation expectations and the strong NZD, it does look like the RBNZ will be dragged back to the easing table once again."


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