NZ inflation seen edging above RBNZ mid-point this year, survey shows

Tuesday 25th February 2014

New Zealand inflation will average 2.03 percent in the coming year, just above the mid-point of the Reserve Bank's target range, as economic growth picks up pace and interest rates rise, according to the central bank's quarterly survey of expectations.

Inflation expectations for the year ahead have risen from 1.94 percent in the December quarter, according to the survey of business managers, conducted by ACNeilson for the Reserve Bank. Expectations for inflation two years ahead barely budged, slipping to 2.33 percent from 2.34 percent.

The survey comes ahead of the Reserve Bank's March 13 monetary policy statement, which is expected to include a quarter point increase in the official cash rate to 2.75 percent, the first increase to a rate that's been kept at a record low 2.5 percent since March 2011.

At Governor Graeme Wheeler's last review on Jan. 30, he said the New Zealand economy has "considerable momentum" which will require interest rates to return to more normal levels as inflation stirs.

"Expectations of inflation over the medium term remain stubbornly above the 2 percent midpoint of the Reserve Bank's target band," said Michael Gordon, senior economist at Westpac Banking Corp. "It's unlikely that the latest survey will have much bearing on the RBNZ's decision to begin raising the OCR at its next review in March, but it does underscore that the RBNZ has some work to do to re-establish the credibility of its inflation target. "

The survey shows economic growth is seen accelerating to 3.23 percent in the year ahead, up from the 2.96 percent pace predicted in the December quarter, while expectations for growth two years out was little changed at 2.88 percent. The 90-day bank bill rate is seen at 3.63 percent in a year's time from a level of 3.01 percent expected for the end of the current quarter.

The jobless rate is seen falling to 5.62 percent in a year's time from a previous expectation of 5.86 percent, while the two-year-out rate is seen falling to 5.36 percent from 5.56 percent.

The kiwi dollar is seen falling to 82.10 US cents next quarter from 83.21 cents currently. In a year's time it is expected to have eased to 81.10 cents. The New Zealand dollar is seen edging up to 92.40 Australian cents next quarter from 92.29 cents currently and slipping back to 91.20 cents in a year's time.

BusinessDesk.co.nz

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