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Inflation expectations ease in Reserve Bank survey as chances of rate cut grow

Tuesday 12th February 2019

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Business managers and finance professionals trimmed their inflation expectations in the latest Reserve Bank survey, at a time when traders are pricing in a growing chance of lower interest rates. 

Respondents to the central bank's quarterly survey predict consumer price inflation of 1.82 percent a year from now, down from the 2.09 percent rate expected in the December survey. Two-year expectations were for inflation of 2.02 percent, down 1 basis point (0.01 percent) from the previous survey. 

A net 68.3 percent of firms believe current monetary conditions are easier than neutral, compared to a net 63.8 percent in December. "Easier than neutral" indicates rates which are low enough to stoke growth. Meanwhile, a net 75.6 percent of respondents predict easier conditions in a year's time, up from 52.2 percent three months ago. 

The Reserve Bank will release its first monetary policy statement of the year tomorrow afternoon. 

Governor Adrian Orr is expected to keep the official cash rate at a record low 1.75 percent, although traders will be closely watching his tone and language, given US and Australian central bankers have indicated policies of lower rates for longer. Traders are pricing in a 42 percent chance of a rate cut by June and a 100 percent chance over the next 12 months.

ASB Bank economist Mark Smith said the lower short-term interest rate track was in line with recent declines in fuel prices, and longer-term inflation expectations appear anchored around the central bank's 2 percent target. 

"We expect the RBNZ to remain focused on medium- to long-term inflation expectations, of which the outlook for GDP growth is a key ingredient," he said in a note.

The survey's respondents trimmed their outlook for economic growth, predicting GDP to respectively rise at an annual rate of 2.38 percent and 2.36 percent one and two years ahead. They had previously expected annual GDP growth of 2.44 percent on both horizons. 

The unemployment rate is seen at 4.17 percent in a year's time and 4.27 percent in two years. Statistics New Zealand figures last week showed the rate at 4.3 percent in December. It was released after the RBNZ survey was conducted Jan. 23-24. 

Respondents expected wages to rise 2.9 percent over the coming year and 2.86 percent in two years, down from 2.92 percent and 3.04 percent respectively in the December survey. 

Expectations of house price inflation also eased, with respondents predicting prices to rise 1.91 percent in the coming year, and 2.14 percent over the next two years. They'd previously predicted increases of 2.86 percent and 2.31 percent respectively. 

(BusinessDesk)

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