Inflation expectations barely budge in latest RBNZ's quarterly survey

Tuesday 2nd August 2016

New Zealand inflation expectations barely budged in the Reserve Bank's latest quarterly survey, suggesting the prospect of little increase in prices is becoming entrenched after undershooting the bank's target for eight straight quarters.

Expectations for inflation one year out rose to 1.26 percent from 1.22 percent in the previous survey, while the two-year ahead figure was little changed for a third straight quarter at 1.65 percent from 1.64 percent three months ago.

The survey is closely watched because economists are betting the Reserve Bank will cut the official cash rate a quarter point to a record-low 2 percent on Aug. 11 in a bid to drive down the kiwi dollar and attempt to push annual inflation back up within its 1 percent-to-3 percent target band.

Based on its June 9 monetary policy statement, inflation will reach 1.3 percent in the fourth quarter of this year, but the projection assumed the trade-weighted index would average 71.6 in the third quarter but the TWI is currently at 76.44, strong enough to prevent the economy importing any inflation. Tradables inflation, which includes goods and services that compete with imported rivals, actually fell 1.5 percent in the second quarter from a year earlier.

"The high New Zealand dollar and low oil prices, on top of global growth concerns, global spare capacity and capacity in the New Zealand labour market all reinforce our view the RBNZ will need to provide further stimulus to ensure inflation returns comfortably within the target band," said Kim Mundy, an economist at ASB Bank. "We continue to expect further cuts from the RBNZ this year, with a 25 basis point cut apiece in August and November."

The survey shows inflation of 0.34 percent is expected this quarter, little changed from 0.33 percent three months ago, before slowing to 0.27 percent next quarter.

The survey shows gross domestic product is seen rising 0.66 percent in the current quarter and growing 2.52 percent one year out and 2.42 percent two years out. That's a faster trajectory than was seen three months ago, when the survey had growth in the quarter of 0.59 percent, one-year out growth of 2.24 percent and two-year-out growth of 2.33 percent.

The kiwi dollar is expected to fall to 68.4 US cents next quarter and decline to 65.9 cents one year out compared with its current level of 71.88 cents.

BusinessDesk.co.nz

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