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NZ inflation expectations ease over two-year horizon, RBNZ survey

Monday 6th November 2017

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New Zealand firms once again dialled back their two-year inflation expectations and also lowered their growth forecasts, which will likely add to the view the central bank will reiterate that rates will remain on hold until 2019 at Thursday's review. 

The Reserve Bank's survey of expectations showed respondents see annual inflation at 1.87 percent in one year versus 1.77 percent rate in the prior survey three months ago. In two years it is seen at 2.02 percent, down from 2.09 percent.

The central bank is mandated to keep annual consumer price inflation between 1 percent and 3 percent, with a focus on the midpoint. Annual inflation was running at 1.9 percent in the third quarter. 

The survey comes just days before the Reserve Bank is scheduled to release its latest official cash rate decision and monetary policy statement. All 16 economists polled by Bloomberg expect the central bank to keep rates at a record low 1.75 percent. In its August monetary policy statement, the central bank forecast rates would stay on hold until at least September 2019.

Recently, however, the New Zealand dollar has fallen sharply and is now 7 percent below where the central bank forecast it would be on a trade-weighted index basis.  There are also signs of inflationary pressure, in particular as the new government is planning to lift minimum wage and increase infrastructure spending. 

While the central bank may rejig its forecasts Thursday to note rising inflationary pressure and a weaker currency, economists expect an extremely cautious tone.

Firms trimmed their expectations for economic growth on an annual real gross domestic product basis to 2.65 percent for the year ahead from 2.75 percent and to 2.45 percent from 2.64 percent for two years ahead. 

The jobless rate is seen at 4.66 percent in one year, down from a prior view of 4.78 percent. Wage growth is also expected to remain tepid. Annual hourly wage growth for one year ahead is seen at 2.25 percent versus 2.26 percent in the prior survey and to 2.57 percent in two years from 2.49 percent.

The New Zealand dollar is expected to be at 70.40 US cents by the end of December versus 71.30 cents in the previous survey. It is expected to be at 70 US cents a year from now versus a prior view of 70.10. It recently traded at 68.94 US cents. 


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