NZ inflation expectations slump to lowest in more than 20 years

Tuesday 16th February 2016

New Zealanders' perceptions of inflation have become even more subdued, adding to the case for a further interest rate cut by the Reserve Bank.

The RBNZ Survey of Expectations shows respondents see annual inflation one year out at 1.09 percent, down from the 1.51 percent rate seen in the last survey three months ago. Expected inflation in two years' time has been lowered to 1.63 percent from 1.85 percent.

That's the lowest level of expectations since 1994, according to Westpac Banking Corp, and follows similar declines in market-based measures of inflation. The survey shows inflation at the end of the current quarter is seen at 0.2 percent, down from 0.29 percent three months ago, while for next quarter, the rate was lowered to 0.33 percent from 0.46 percent.

The New Zealand dollar dropped about half a US cents, to 66.11 US cents from 66.63 cents, after the survey was released, on speculation the case for a further rate cut is building. Westpac chief economist Dominick Stephens says a cut in March "is a live possibility", although it expects a move in June.

Stephens says the survey calls into question the central bank's argument that it can tolerate an extended period of extremely weak inflation because it views the phenomenon as temporary and expects monetary policy to drive inflation back to the 2 percent mid point of its target band in the future.

"A crucial piece of evidence in the RBNZ's argument has been that inflation expectations remained close to 2 percent, even when inflation was low," he said. "Falling inflation expectations across market and survey-based measures is now calling that argument into question. Low inflation expectations may start to impact wage claims and price setting behaviour, in turn leading to even greater downward pressure on inflation."

The 90-day bank bill rate is seen at 1.62 percent at the end of the current quarter, down from 2.79 percent in the previous survey. One year out the rate is seen at 2.52 percent, down from 2.79 percent. Still, quarterly economic growth is seen slightly more buoyant, at 0.65 percent for the previous quarter, up from 0.49 percent three months ago, and 0.58 percent in the current quarter, up from 0.5 percent.

BusinessDesk.co.nz

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