NZ firms lift 2-year inflation expectations, some signs of life in wage growth

Wednesday 14th February 2018

New Zealand firms lifted their two-year inflation expectations and growth forecasts, pushing up the kiwi dollar by pointing to inflationary pressures emerging after a long hiatus.

The Reserve Bank's latest survey of expectations showed respondents see annual inflation at 1.86 percent in one year versus the 1.87 percent rate in the prior survey three months ago. Two-year expectations are seen at 2.11 percent up from 2.02 percent. The New Zealand dollar rose to 73.07 US cents from 72.72 US cents just prior to the release.

The central bank is mandated with keeping annual consumer price inflation between 1 percent and 3 percent over the medium term, with a focus on the midpoint. Annual inflation was running at 1.6 percent in the fourth quarter.

Acting Reserve Bank governor Grant Spencer kept the official cash rate at 1.75 percent in the February review and continued to signal rates won't lift until the latter half of next year at the earliest due to the lack of inflationary pressure. The central bank, however, keeps a close watch on inflation expectations as they have an impact on wage and price setting behaviour.

While fourth-quarter jobs continued to show an influx of workers was keeping a lid on wage inflation - with the unemployment rate at 4.5 percent - today's survey pointed to growing expectations for higher wages.

Annual hourly wage growth for one year ahead is seen at 2.48 percent versus 2.25 percent in the prior survey and increases to 2.68 percent in two years from 2.57 percent. The jobless rate is seen at 4.55 percent in one year, down from a prior view of 4.66 percent.

Firms lifted their expectations for economic growth on an annual real gross domestic product basis to 2.75 percent for the year ahead from 2.65 percent and to 2.52 percent from 2.45 percent for two years ahead.

The New Zealand dollar is expected to be at 72 US cents by the end of June, up from 70 in the prior survey. However, it is expected to fall to 70 by December this year.

(BusinessDesk)

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