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Business managers' inflation expectations lift as recession memory fades

Tuesday 25th May 2010

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New Zealand business managers’ expectations of economic performance and inflation for the next two years has lifted, according to a central bank survey.

The Reserve Bank’s survey of expectations, conducted by Nielsen on May 11 and May 12 shows that expectations of consumer price inflation one year ahead has climbed to 2.9% from 2.1% three months ago. The expected quarterly rise in the CPI in June quarter is 0.5%, compared to 0.6% in the last survey. Two-year-ahead expectations have also increased, to 2.8% from 2.65%.

BNZ head of research Stephen Toplis said inflation expectations are a key part in the Reserve Bank’s policies. “The behaviour and responses to where people think inflation will be are very important in the bigger picture,” he said.

The figure for the year ahead’s inflation indicates that managers haven’t necessarily factored in GST, ACC and Emission Trading Scheme increases. The 2.8% expected increase in two-year-ahead inflation also shows that managers don’t expect those increases will have unwound during that time.

“If inflation expectations go up, then real inflation will go up too,” Toplis said. “That’s because people will need to compensate for higher prices, or households may expect higher wage rounds.”

The revelation of inflation expectation figures may see RBNZ governor Alan Bollard trying to keep a lid on inflation expectations during the coming months Toplis said.

According to the survey, current monetary conditions are perceived as relatively easy, but by the first quarter of 2011, an increasing proportion of respondents expect tighter monetary conditions to prevail.

By March 2011, the unemployment rate is expected to have fallen to 5.9%, and a year later to have dropped further to 5.5%. The latest official unemployment figure for the March 2010 quarter is 6%.

The most dramatic change in expectations is in GDP growth. This quarter’s GDP expectation is 2.7%, compared to a -0.2% growth expectation in the June 2009 quarter. The two year growth expectations have improved by 0.2 percentage points and are now 2.8%.  The latest Statistics NZ data indicates real production-based GDP increased by 0.5% between December 2008 and December 2009.

The 90-day bank bill rate is expected to be 3% by the end of June 2010, but will have increased to 4% by March 2011, consistent with an expectation of tightening monetary conditions.

Sixty one percent of a sample of 121 managers responded to the survey, where participants expect an exchange rate of US$0.72 for the NZ dollar by the end of September, with the expectation only a little lower for the end of March 2011. The NZD/AUD exchange rate is expected to be around NZ$0.80 by the end of March 2011, about where it is now.

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