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Inflation expectations edge lower

Tuesday 24th August 2010

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New Zealand business managers expect inflation will accelerate short-term, reflecting the impact of the increase in goods and services tax and other imposts, according to the central bank’s survey of expectations.

One-year-ahead annual CPI expectations rose to 3.9% from 2.9% in the second-quarter survey, according to the nationwide survey of business managers conducted by Nielsen. By contrast expectations for two years ahead fell to 2.56% from 2.8%, the survey showed.

The Reserve Bank began raising the official cash rate in June, with two quarter-point increases bringing the OCR to 3%. The RBNZ survey shows monetary conditions are currently perceived as relatively neutral though by the second quarter of 2011 more respondents expect tighter monetary conditions.

Hourly earnings are expected to rise over the next two years, with one-year earnings growth expectations now at 2.4% and two-year at 2.9%. By June next year, the unemployment rate is expected to have fallen back down to 6.1% from 6.8% currently.

Respondents pared back their expectations for gross domestic product one year ahead to a pace of 2.3%, down 0.4 percentage point from the previous quarter. Looking out two years, expectations were unchanged at 2.8%. The economy is expected to have grown 0.5% in the June quarter and to expand 0.7% in the September quarter.

Then 90-day bank bill rate is expected to be 3.4% by the end of September, up from 3.3% when the survey was taken on August 11 and 12. By June 2011, the rate is seen rising to 4.3%, consistent with tighter monetary conditions. By then, the yield on 10-year government bonds is expected to be about 5.7%.

The market kept its expectation for the central bank to hike the OCR 52 basis points over the coming 12 months, according to the Overnight Index Swap curve, while the New Zealand dollar was little changed at 70.33 US cents.

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