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Business managers look forward to growth


Wednesday 24th August 2011

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Inflation expectations in New Zealand fell in the third quarter while economic growth is expected to be higher over the coming year, a survey showed on Tuesday.

The quarterly survey of expectations done on behalf of the Reserve Bank (RBNZ) showed business managers forecast annual inflation to average 2.94 percent over the coming year, compared with 3.12 percent in the last survey in May. Two-year inflation expectations -- seen as the time frame when policy action will filter through to prices -- eased to 2.86 percent from 3.0 percent. The RBNZ focuses its monetary policy on the consumer price index , which increased 5.3 percent from a year ago in the second quarter, the highest since June 1990, driven partly by a rise in sales tax and one-off government charges. The bank estimated that underlying inflation was only around 2.5 percent, tracking within the 1-3 percent target band.

The RBNZ held its cash rate at 2.5 percent last month but said there was little need for the rate to stay at the record-low equalling level if the global financial risks recede and the economy continues to recover. But recent market turbulence and the bleaker global outlook has seen analysts and markets scale back their expectations of RBNZ rate rises. A Reuters poll of 18 analysts on Friday showed a majority expects a hike in December, with eight seeing either a 25 or 50 basis point rise while seven expect a hike in September, with the odds of the bank remaining on hold increasing. The rest are spread between December and the first half of next year. That compares with 10 of 18 analysts expecting a September rise a week earlier and 17 of 18 immediately after the previous rate review on July 28. The survey also showed economic growth is seen at 2.9 percent in the coming year, from 2.1 percent in the previous survey. Over two years, growth edged up to 2.9 percent from 2.8 percent. The economy grew 0.8 percent, the fastest pace in more than a year in the March quarter as it shrugged off devastating earthquakes. It grew 0.2 percent in the December quarter, after a 0.2 percent contraction in the September quarter. Analysts expected the economy to pick up pace later in the year, led by the Rugby World Cup and the $15 billion rebuilding of Christchurch.

Across the Tasman, interest rates might also be on hold for a while longer, after the Australian central bank said it was still unclear how recent turmoil in world markets would impact on economic activity at home and abroad.

Reserve Bank of Australia (RBA) deputy governor Ric Battellino said the past year had been a challenging one for policy with a booming mining sector and higher inflation set against subdued consumption and a strong local dollar. Downside risks to the global economy had also increased significantly due to the volatility in financial markets and was a major reason the central bank decided not to raise interest rates at its monthly policy meeting on Aug. 5. "As you know, since then market volatility has become more extreme," Battellino told an economics conference. "An important issue ahead of us will be to assess what impact this is likely to have on global and domestic economic activity, commodity prices and inflation," he said. "As yet, there is little information on which to base such judgements." The central bank considered raising rates this month to head off rising inflation, but decided to stay at 4.75 percent due to acute uncertainty in global financial markets.

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