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NZ firms pare two-year-ahead inflation expectations in RBNZ survey

Tuesday 21st August 2012

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New Zealand firms have pared back their expectations for rising consumer prices over the next two years after inflation dribbled to its slowest pace in 13 years in the second quarter.

Respondents to the Reserve Bank's quarterly survey of expectations trimmed 9 basis points from their two-year-ahead consumer price index to 2.32 percent, while keeping their one-year ahead median forecast at 2 percent. That comes after government figures showed CPI slowed in the three months ended June 30 to 1 percent, the slowest annual pace since 1999 and at the bottom end of the central bank's target band.

"The decline in medium-term inflation expectations highlights the lack of urgency for the RBNZ to increase the OCR over the coming year," ASB economist Jane Turner said in a note. "We expect that inflation pressures will eventually pick up over 2013/2014 as offshore concerns fade and the economic recovery gains momentum - particularly once Canterbury rebuild activity starts to lift."

The nationwide quarterly questionnaire of business managers conducted by the Nielsen Company received a 63 percent response rate out of its sample of 115.

Respondents said monetary conditions are "currently perceived as being easy and are expected to remain relatively easy over the forecast horizon."

A net 18 percent of respondents said monetary conditions are easier than neutral, and by December this year, a net 21 percent expect looser policy.

Respondents expect the 90-day bank bill rate to be 2.7 percent by the end of September, rising to 3 percent by June next year. The rate is currently 2.68 percent.

The 10-year government bond rate is expected to be 3.9 percent by the end of June, from 3.8 percent today.

Surveyed business managers see the New Zealand dollar falling to 78 US cents by the end of September, and staying at that level until March next year, and rising to 79 Australian cents. The kiwi recently traded at 81.06 US cents and 77.30 Australian cents.

Respondents increased their growth expectations by 0.2 of a percentage point, picking year-ahead gross domestic product of 2.2 percent. Two-year-ahead forecasts fell to 2.4 percent from 2.3 percent.

One-year wage expectations were flat at 2.5 percent, while two-year ahead increased to 2.8 percent from 2.7 percent, while unemployment expectations were steady at 6.3 percent and 5.9 percent for the one-year and two-year outlooks respectively.

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