RBNZ survey shows falling inflation expectations; dollar down

Tuesday 21st February 2012

New Zealand firms have cut almost half a percentage point from their inflation outlook for the coming year, after consumer prices unexpectedly fell in the last three months of 2011.

Respondents to the Reserve Bank inflationary expectations survey cut their expectation for inflation over the year ahead to 2.24 percent, from 2.7 percent just before Christmas, while two-year expectations fell to 2.2 percent from 2.82 percent. Across the 75 businesses that respond, the CPI is expected to rise 0.5 percent in each of the March and June quarters.

The kiwi dollar fell after the release of the Reserve Bank of New Zealand’s this afternoon, and recently traded at 83.42 US cents, from 83.81 cents immediately beforehand.

“The extent of the decline in expectations is slightly surprising, given in two years we would expect rebuilding activity in Canterbury to be driving a pick-up in construction prices and see inflation rising back toward the higher end of the RBNZ’s target band,” ASB economist Jane Turner said in a note.

“The survey suggests that wage and price-setting behaviour remains well contained for now and the RBNZ can be less concerned about the potential spill-over into more generalised inflation pressures,” she said.

The tepid pace of inflation has given Reserve Bank Governor Alan Bollard room to keep interest rates at historically low levels, and traders are betting he will hike the official cash rate just 19 points from its current 2.5 percent setting over the coming 12 months, according to the Overnight Index Swap curve.

The 90-day bank bill, often seen as a proxy for the OCR, is expected to be at 2.8 percent at the end of March, rising to 3 percent by the end of the year. The yield on 10-year government bonds are expected to be near 4.3 percent by the end of the year.

Survey respondents kept their expectations for economic growth in line with the previous report, with one-year ahead gross domestic product flagged to expand 2.1 percent and two-year growth at 2.6 percent.

Firms are less upbeat about employment, with one-year expectations for the unemployment rate at 6.2 percent, up from 6 percent in the December survey, and two-year ahead expectations at 5.8 percent, compared to 5.7 percent three months ago. That’s still down from the current jobless rate at 6.3 percent.

One-year ahead hourly earnings growth fell to 2.4 percent from 2.7 percent, and two-year ahead growth expectations dipped to 2.8 percent from 3 percent.

(BusinessDesk)

BusinessDesk.co.nz

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