Why RBNZ will Hold OCR at 1%

By Sophia Rodrigues

I am a bit surprised with market reaction to RBNZ's inflation expectations survey yesterday. While I acknowledge the importance of this survey (I've been a big fan of this data myself), and the fact that inflation expectations was a key factor in RBNZ's bigger 50bps cut in August, I think too much weight has been placed on this data. The RBNZ OCR decision today is likely to be a very close call, and they may well cut (I am in the on-hold camp though) but I'll be very surprised if inflation expectations is going to be a key reason behind it. Monetary policy is forward-looking and I see several reasons for RBNZ to stay on hold, including lower NZD, higher-than-expected non-tradable inflation, rising house prices, stable longer-term inflation expectations, higher-than-expected net migration, and change in expectations for easing by global central banks.