Inflation expectations on iPredict rise this week, but market still sees RBNZ raising OCR 25 bps to 2.75% on Dec 8

See the latest update from iPredict:

Key Points:
•       Growth forecasts remain weak
•       Unemployment to remain above 6% and annual inflation above 3% for at least a year
•       OCR to remain at 2.5% until election
•       John Key to be re-elected and could govern alone if Act and UnitedFuture leave Parliament
•       Phil Goff safe as Labour Leader until election

Commentary:

John Key is expected to remain Prime Minister after this year’s General Election, regardless of whether or not the Act and UnitedFuture parties win Epsom and Ohariu, the weekly snapshot from New Zealand’s online prediction market, iPredict, again indicates.

Economic Context

Recession fears have eased further over the last week with the probability the economy will be in a recession in the June 2011 quarter down to 22% from 26% last week.  Negative growth continues to be expected in the March 2011 quarter but there is now a 26% probability growth will be above 0% for that quarter, up from 11% last week.  Recession expectations for the September and December 2011 quarters remain steady at 14% and 12% respectively.

However, growth forecasts remain weak.  Growth for each of the next five quarters to be reported is expected to be -0.2% for the March 2011 quarter (up from -0.3% last week); 0.2% for the June 2011 quarter (steady); 0.6% for the September 2011 quarter (steady); 0.7% for the December 2011 quarter; and 0.5% for the March 2012 quarter.

Unemployment forecasts are also steady.  Unemployment is expected to be 6.8% in the March 2011 quarter (no change from last week); 6.7% in the June 2011 quarter (no change); 6.3% in the September 2011 quarter (no change); 6.4% in the December 2011 quarter; and 6.5% in the March 2012 quarter.

Inflation expectations are slightly up overall compared with last week.  Annual inflation is expected to be 4.8% in the March 2011 quarter (up from 4.6% last week); 5.3% for the June 2011 quarter (steady); 5.0% for the September 2011 quarter (up from 4.9% last week); 3.1% for the December 2011 quarter; and 3.1% for the March 2012 quarter.

Big petrol price rises continue to be forecast, although the strength of expectations has fallen slightly.  The probability that unleaded petrol prices will exceed $2.20 per litre in 2011 is steady at 90%, but the probability it will exceed $2.30 per litre has fallen from 60% last week to 54% this week.  The probability it will exceed $2.40 per litre has continued its slide and is now 34%, from 35% last week, 40% two weeks ago and 45% three weeks ago.  The probability it will go above $2.50 per litre also continues to slide and is now 24%, from 27% last week and 33% two weeks ago.

The market continues to expect that Reserve Bank Governor Alan Bollard will leave the OCR at 2.50% for most of the year before raising it to 2.75% on 8 December.  There is a 98% probability he will leave it unchanged on 28 April (steady compared with last week); an 87% probability he will leave it unchanged on 9 June (down from 93% last week); an 87% probability he will leave it unchanged on 28 July (up from 86% last week); an 88% probability he will leave it unchanged on 15 September (up from 66% last week); a 69% probability he will leave it unchanged on 27 October (steady) and a 50% probability he will increase it to 2.75% on 8 December (up from 48% last week).

Expected yields for 90-day bank bills are largely unchanged from last week.  The expected 90-day rate on 1 June 2011 is 2.57%, the expected 90-day rate on 1 September 2011 is 2.76% and on 1 December 2011 2.93%.

Average floating-rate mortgages continue to be expected to stay low.  The probability they will reach 6.50% in 2011, from the 5.90% reported by the Reserve Bank for March 2011, is now 17%, up from 16% last week.

Election Date, Parties & Personnel

The market continues to indicate a 97% probability that the election will be held on Saturday 26 November.  All current leaders of parliamentary parties have at least an 83% probability of remaining in their positions until then, with the probability that Labour Leader Phil Goff will be replaced before the election having fallen back to just 17%, from 22% last week and 42% the week before.

The probability of a new party being registered prior to the election involving at least two of Independent MP Hone Harawira, Unite National Secretary Matt McCarten and former Green MP Sue Bradford is 30%, down from 34% last week.  The probability that a new party will be registered involving former National Party Leader Don Brash is now down to 7%, from 11% last week, 12% two weeks ago and 16% three weeks ago.

Key Electorate Contests

The probability Act Leader Rodney Hide will retain Epsom for his party is up to 67%, from 63% last week and 57% two weeks ago.  UnitedFuture Leader Peter Dunne has a 55% probability of being re-elected in Ohariu, down from 57% last week, but still well ahead of a National candidate (27% probability, down from 28% last week) or a Labour candidate (19% probability, up from 17% last week).

The probability Winston Peters will be returned to Parliament remains steady at 30%, as do the probabilities he will stand in Epsom (17%) or in Helensville (11%).
In the Maori electorates, the Maori Party’s hold on Tamaki-Makaurau has weakened marginally over the last week, with a 74% probability it will be held by Maori Party’s Co-Leader Pita Sharples, down from 78% last week and 81% three weeks ago.  Mr Harawira’s hold on Te Tai Tokerau has also weakened slightly, from 78% probability last week to 75% this week.  Labour continues to have a 70% probability of winning Hauraki-Waikato and a 50% probability of winning Te Tai Tonga while the Maori Party continues to have a 52% probability of winning Ikaroa-Rawhiti, a 77% probability of winning Te Tai Hauauru and an 82% probability of winning Waiariki.

Other than those mentioned above, there are five seats where the projected winner has less than a 75% probability of winning.  Auckland Central has a 71% probability of being retained by National’s Nikki Kaye (down from 73% last week and 76% the week before); New Plymouth a 53% probability of being won by Labour’s Andrew Little from National’s Jonathan Young, (up from 52% last week); Waimakariri a 73% probability of being retained by Labour’s Clayton Cosgrove (steady); Waitakere a 66% of being retained by National’s Paula Bennett (steady); and West Coast-Tasman a 50% probability of being won by Labour’s Damien O'Connor over National’s Chris Auchinvole.  Mr Auchinvole has a 48% probability of retaining the seat, up from 47% probability last week.

Overall, there has been no change in expected electorate seat tallies over the last week, with National expected to win 39 electorates, Labour 24, the Maori Party 4 and Act, UnitedFuture and Mr Harawira 1 each.

Party Vote, Election Result and Alternative Scenarios

Forecast party vote shares are: National 46.5% (steady compared with last week), Labour 31.9% (steady), the Greens 7.0% (steady), New Zealand First 4.7% (up from 4.3%); Act 4.0% (up from 3.6%), UnitedFuture 2.2% (up from 1.7%), the Maori Party 1.7% (down from 1.8%), a party around Mr Harawira 1.3% (up from 1.2%), the New Citizen Party 0.7% (steady) and the proposed Reform New Zealand Party 0.4% (down from 0.5%).

Based on this data, and the electorate results above, Parliament would be as follows: National 59 MPs, Labour 40 MPs, Greens 9 MPs, Act 5 MPs, the Maori Party 4 MPs, UnitedFuture 3 MPs and a party around Mr Harawira 2 MPs, for a total of 122 MPs.  A government would be required to have the support of 62 MPs on confidence and supply so that National’s Mr Key could govern with the support of one of the Act, Maori Party or UnitedFuture parties.

Were the Maori Party to win the most marginal electorate, Te Tai Tonga, the only difference would be that it would have 5 MPs and Parliament a total of 123 MPs.  Mr Key would continue to be able to govern with the support of one of the Act, Maori Party or UnitedFuture parties.
iPredict has also examined the impact of Mr Hide and Mr Dunne losing their seats.

Were Act not to win Epsom, Parliament would be as follows: National 62 MPs, Labour 42 MPs, Greens 9 MPs, the Maori Party 4 MPs, UnitedFuture 3 MPs and a party around Mr Harawira 2 MPs, for a total of 122 MPs.  A government would be required to have the support of 62 MPs on confidence and supply and Mr Key could govern alone.

Similarly, were both Act to lose Epsom and UnitedFuture to lose Ohariu, Parliament would be as follows: National 63 MPs, Labour 43 MPs, Greens 10 MPs, the Maori Party 4 MPs and a party around Mr Harawira 2 MPs, for a total of 122 MPs.  A government would be required to have the support of 62 MPs on confidence and supply so that, again, Mr Key could govern alone.

Finally, iPredict has analysed the result were both Act and UnitedFuture to leave Parliament while the New Zealand First Party secured MMP’s 5% threshold.  Under this scenario, Parliament would be as follows: National 60 MPs, Labour 41 MPs, the Greens 9 MPs, New Zealand First 6 MPs, the Maori Party 4 MPs and a party around Mr Harawira 2 MPs, for a total of 122 MPs.  In this case, Mr Key would require the support of the Maori Party (or Mr Harawira) to govern while Mr Goff could govern with the support of all of the Greens, New Zealand First, the Maori Party and Mr Harawira’s party.

Overall, the market indicates an 84% probability there will be a National Prime Minister after the election, up from 83% last week.

Miscellaneous

In the Rodney electorate, where the National Party’s selection process was scrapped and started again, Mark Mitchell remains favoured with 62% probability, down from 63% last week.  Brent Robinson is second-favourite, with 34% probability of being selected, up from 22% last week.

The probability New Zealanders will elect to retain the MMP voting system in the referendum to be held on Election Day is back up to 80%, from 77% last week.
iPredict is providing full election coverage this year, with contract bundles for the party vote and for every electorate race in the country now available for trading.

The company is owned by Viclink, the commercial arm of Victoria University of Wellington.  Details on the company and its stocks can be found at www.ipredict.co.nz

The weekly political snapshot is taken at a random time each week to avoid market manipulation by political parties or activists.  This week’s was taken at 9.02 am today.