NZ inflation expectations dip in June quarter, wage pressures seen rising

Tuesday 8th May 2018

New Zealand businesses see a slower pace of inflation in the coming year, although firms anticipate wages will rise at their fastest pace in four years as economic growth remains robust.

The Reserve Bank's survey of expectations shows firms see the consumers price index reaching 1.8 percent over the coming year, marginally lower than the 1.86 percent pace predicted in the March quarter, although still higher than the current 1.1 percent pace. Two-year ahead inflation expectations also declined to 2.01 percent from 2.11 percent, the midpoint of the central bank's 1-to-3 percent target band.

New Zealand's pace of inflation has been muted in recent years as a strong currency and flat wages helped restrain price increases, meaning the Reserve Bank could keep the official cash rate at a record low 1.75 percent level. The currency has come off in recent months as the prospect of higher US interest rates have reignited the attraction of the greenback, and some economists have speculated that could drive up domestic headline inflation.

Governor Adrian Orr will deliver his first monetary policy statement on Thursday and is expected to keep the OCR on hold, with a flat forward track. Today's survey shows firms see an outside chance of a hike over the coming year, predicting the OCR will be at 1.87 percent in a year.

The RBNZ survey shows businesses also expect wages to rise more quickly over the coming years, predicting year-ahead wage growth of 2.81 percent and two-year ahead growth of 2.93 percent, the fastest pace since June 2014. Unemployment is expected to keep falling, with firms predicting the jobless rate to be 4.43 percent in a year's time and 4.48 percent the following year.

Government figures last week show the unemployment rate fell near at a nine-year low 4.4 percent in the March quarter, while private sector hourly wages rose an annual 4 percent.

Firms survey trimmed their expectations for gross domestic product to grow in the coming year to 2.64 percent from 2.75 percent, although the two-year ahead prediction rose to 2.7 percent from 2.52 percent.

The survey showed firms predict the kiwi dollar will be at 70.30 US cents and 91.80 Australian cents a year from now. It recently traded at 70.16 US cents and 93.46 Australian cents.

The yield on 10-year government bonds is seen rising to 3.37 percent in a year, which would be the highest since March 2017. The yield was recently at 2.79 percent.

(BusinessDesk)

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