It has moved the next OCR increase back three months from December to March next year.
"The interaction between dairy prices, the NZ dollar and interest rates suggest that something will have to give. In the absence of a substantial rebound in global dairy prices or a substantial fall in the NZ dollar, interest rates will have to remain stimulatory for longer than we had expected."
ASB chief economist Nick Tuffley says a longer pause in the tightening cycle would buffer the economy from lower dairy prices and continued strength in the dollar.
"Recent inflation outcomes also suggest the Reserve Bank has time on its side."
The latest labour market data show a continued moderation in construction labour cost growth in Canterbury despite strong construction employment.
"This suggests capacity pressures in Canterbury are not translating to as much cost growth as initially feared."
He also says that softer than expected non-tradable inflation will ease capacity pressures and headline inflation remains in the bottom half of the Reserve Ban's inflation target band.
"Both we and the RBNZ do not expect inflation to reach the 2% mid-point target until mid-2015."
The continued moderation in house price inflation should also be of comfort for the central bank.
"Annual house price inflation peaked at just over 10% late last year, and recent housing market indicators suggest house price inflation may undershoot the RBNZ’s forecast."
Despite pushing back the date for the next OCR rise there is still the possibility the Reserve Bank will move earlier.
"To the extent we saw the risk to our December call as skewed to a later increase in the OCR, we see the risk to our new March call as skewed to an earlier OCR increase."
Underpinning these risks that an OCR could come earlier than March are:
- Sharp drop in the NZD and/or a strong rebound in global dairy prices – this would reverse a key rationale for us pushing out our forecast of the next OCR increase.
- Stronger than expected net migration, and the relative effects on household demand versus labour supply.
- Stronger wage growth than the RBNZ forecast. The RBNZ’s June MPS forecast of 1.7% annual labour cost inflation for the year to March 2015 is looking low in light of the Q2 labour market data showing a pick-up in wage growth.
ASB is forecasting 25 basis point OCR increases in March, June, September and December next year.
"Our updated OCR view is broadly in line with current market pricing through to June 2015. Beyond that, we expect the OCR to be raised faster and by more than markets currently expect. We continue to expect the OCR to peak at 4.5%, but now expect this peak will not be reached until the end of 2015," Tuffley says.
