NZ inflation expectations pick up in RBNZ's September survey

Tuesday 20th August 2013

New Zealand inflation expectations have bounced back from a 14-year low in the Reserve Bank's latest survey of business managers as governor Graeme Wheeler moves to take pressure off monetary policy by imposing tough home lending restrictions.

One-year ahead inflation expectations rose 38 basis points to 1.9 percent in the September survey of 82 business managers and professionals, and two-year ahead expectations increased 30 basis points to 2.36 percent. New Zealand's consumers price index has been running below the central bank's 1 percent to 3 percent target band for the past year, and inflation was at the slowest pace since 1999 in the June quarter.

Wheeler is tasked with getting inflation to the mid-point of the band, and has been contending with a strong kiwi dollar keeping imported prices down on one hand, and rising Auckland and Canterbury house prices on the other.

Today he announced restrictions on low equity residential lending as a means to take some of the steam out of the property market, without having to resort to an interest rate hike.

"That inflation expectations remain anchored in the upper part of the inflation band reinforces the view that inflation pressures are widely expected to pick up over the coming year," ASB economist Jane Turner said in a note. "The lift also builds a case for the RBNZ to pre-emptively lift the OCR from low levels to keep medium-term inflation pressures in check."

The central bank's survey shows firms have increased their expectations for a higher 90-day bank bill rate, often seen as a proxy for the official cash rate, predicting it will be 2.7 percent by the end of September, and rising to 3.2 percent by June next year. The OCR is currently at 2.5 percent.

Respondents predict the yield on the 10-year government bond will fall to 4.5 percent by June from the current yield of 4.64 percent.

Short-term economic growth expectations have improved, with one-year ahead expectations rising to 2.8 percent form 2.5 percent in the June survey. Two-year ahead expectations fell to 2.7 percent from 2.8 percent.

Unemployment is tipped to fall to 6 percent in the coming year from the previously expected 6.4 percent, and down to 5.7 percent in the two-year ahead expectations from the June quarter's 6 percent prediction.

Respondents see the kiwi dollar at 79 US cents by the end of the year, and down to 77 cents by June, and 87 Australian cents by June next year. The local currency recently traded at 79.90 US cents and 88.04 Australian cents.

BusinessDesk.co.nz

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