Wednesday 30 January 2013

Inflation expectations

Bill Kaye-Blake notes the macroeconomic consequences of the delayed Christchurch rebuild, and wonders whether we consequently should have more stimulatory monetary policy:
First, I could see the logic in the plan. Austerity for reasons of national economic policy — reducing the debt, placating overseas money markets — while getting some Keynesian intervention through Christchurch. Secondly, it didn’t work. It became clear in 2011 that it wasn’t working. Nevertheless, the Government stuck with the plan longer than I think they should have, and longer than the state of the economy warranted.
He puts up graphs showing RBNZ estimates have been optimistic relative to experienced reality for the last several quarters, that core CPI has been low, and that unemployment remains high.

I'm happy to agree with Bill that the stalled rebuild had macro consequences, as well as the general awfulness for folks stuck in very poor housing. But let's have a look at some inflation expectations.

I'm here drawing from iPredict's quarterly markets on inflation rates. The table below has the risk of inflation outcomes above 3% and below 1%, based on the price of shares in the relevant markets.

QuarterProbability inflation
less than 1%
Median expected
Probability inflation
greater than 3%
March 201384%Less than 1%
June 201323%Between 1% and 2%
September 201334%Between 1% and 2%
December 201315%Between 1% and 2%
March 201418%Between 1% and 2%

Inflation risks look pretty balanced over the medium term.

The markets are also expecting no change in the OCR in any quarter through the end of the forecasting horizon. The greatest likelihood of any change is a 21% chance of an 25bp increase in December 2013, though the markets also are pegging pretty stagnant GDP growth rates and an unemployment rate unlikely to drop below 6% before September quarter 2013.

You could maybe justify a small cut to the OCR on that risks currently should be weighted towards breaching the top rather than the bottom of the bound, and on that the median expected rate converges to a shade below 2% rather than a shade above it. But it's hard to see much case for that RBNZ has been grievously tight when they're targeting a medium term.

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