NZ inflation expectations show modest uplift in next two years as economic growth picks up

Wednesday 2nd November 2016

New Zealand inflation expectations for the next two years have increased, a Reserve Bank survey shows, in an economy that respondents believe will pick up pace.

Expectations for inflation one year out rose to 1.29 percent compared to 1.26 percent in the Reserve Bank's previous survey of expectation three months ago. The two-year ahead figure edged up to 1.68 percent from 1.65 percent, although this was little changed for a third straight quarter.

The Reserve Bank releases its monetary policy statement on Nov. 10 and is expected to cut the official cash rate a quarter point to 1.75 percent. Based on its August MPS, annual inflation of 0.2 percent in the third quarter was a low point, with the consumers' price index seen rising to 1 percent on an annual basis, the bottom end of the central bank's target range, in the fourth quarter.

The 90-day bank bill rate, seen as a proxy for the OCR, is expected to be 2 percent by the end of 2016 and be little changed by September 2017. The rate was 2.13 percent when the survey was taken, the Reserve Bank said. Expectations for gross domestic product showed a more marked changed from three months ago.

Year-ahead real GDP growth is seen speeding to 2.75 percent from 2.52 percent in the previous survey, while the 2-year-ahead rate was lifted to 2.51 percent from 2.43 percent. That's still slower than the 3.5 percent pace in the year ended June 30.

The unemployment rate fell to 4.9 percent in the third quarter and is expected to be 5.1 percent in a year's time and 5.06 percent in two years. Expectations for wage growth picked up to an annual pace of 2.25 percent one year out and 2.48 percent in two years, from 2.08 percent and 2.33 percent in the September survey. Based on private sector ordinary time wages, wage inflation was unchanged at 1.6 percent in the third quarter, figures today showed.

The kiwi dollar is expected to fall back to 70 US cents by the end of March next year, from 72.08 cents currently and to reach 68 cents by September next year. The local currency is seen at 93 Australian cents on March 31, from 94.56 cents currently.

BusinessDesk.co.nz

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