NZ inflation expectations edge higher in September quarter

Wednesday 8th August 2018

New Zealand businesses see a slightly faster pace of inflation in the coming year but expectations remain anchored around the middle of the central bank's target range, adding to the view the official cash rate will stay on hold with a flat forward track at tomorrow's review.

The Reserve Bank's survey of expectations shows firms see the consumers price index reaching 1.86 percent over the coming year, up from 1.80 percent predicted in the June quarter, although still higher than the current 1.5 percent pace. Two-year ahead inflation expectations lifted to 2.04 percent from 2.01 percent, the midpoint of the central bank's 1-to-3 percent target band.

"Inflation expectations remain very close to the middle of the RBNZ’s target range. Consequently, this recent increase is unlikely to prompt much concern from the RBNZ ahead of tomorrow’s official cash rate announcement. We expect that the RBNZ will keep the OCR on hold and that they will deliver a broadly neutral policy statement," said Westpac Banking Corp senior economist Satish Ranchhod in a note.

New Zealand's pace of inflation has been muted in recent years as a strong currency and flat wages helped restrain price increases, allowing the Reserve Bank to keep the benchmark rate at a record low 1.75 percent level.

Today's survey shows a net 75 percent of respondents believe current monetary conditions are easier than neutral. This is up from a net 55.3 percent in the previous quarter’s survey. A net 39.6 percent of respondents believe monetary conditions in two years’ time will be easier than neutral.

The RBNZ survey shows businesses also expect wages to rise more quickly in the short term as year-ahead wage growth lifted to 2.88 percent from 2.81 percent but two-year ahead growth remained unchanged at 2.93 percent. The jobless rate is tipped to be 4.43 percent in a year's time and 4.48 percent the following year.

Firms survey trimmed their expectations for gross domestic product to grow in the coming year to 2.32 percent from 2.64 percent and the two-year ahead prediction fell to 2.2 percent from 2.7 percent.

The survey showed firms predict the kiwi dollar will be at 68 US cents and 92 Australian cents in December, unchanged from when the survey was conducted on July 18 and 19. It recently traded at 67.51 US cents and 90.81 Australian cents.

The yield on 10-year government bonds is seen falling to 3.09 percent from 3.37 percent in a year. The 10-year benchmark bond yield was 2.86 percent when the survey was conducted and was recently at 2.78 percent.

(BusinessDesk)

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