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New Zealand financial institutions are picking a slower pace of price increases in the coming year and are not betting on the unemployment rate dropping below 6% for two years, a Reserve Bank survey shows.
Respondents in the central bank's survey of expectations sliced 20 basis points from their one-year median forecast for the consumer price index to 1.77%, below governor Graeme Wheeler's long-term aim under the policy target agreement and the two-year ahead median expectation at 2.3%, down by the same amount.
Respondents are picking CPI to rise 0.3% and 0.5% in the December and March quarters, implying annual inflation of 1.5% and 1.4%, respectively.
"Monetary conditions are currently perceived as being easy, and are expected to remain easy over the forecast horizon," the survey report says.
The subdued inflation outlook comes after third-quarter CPI figures showed consumer prices rose at an annual pace of 0.8%, falling short of the central bank's target band of 1% to 3%.
Last month, Mr Wheeler said he was keeping close tabs on inflation in his debut monetary policy statement and would monitor indicators such as pricing intentions and inflation expectations data closely over coming months.
Respondents were gloomier about the labour market in coming year, with one-year ahead expectations for unemployment rising to 6.8% from 6.3% in the September survey and the two-year forward horizon increasing to 6.3% from 5.9%.
Earnings growth expectations were pared by 10 basis points to 2.4% and 2.7% for the one-year and two-year outlooks, respectively.
Government figures showed the jobless rate unexpectedly rose to a 13-year high 7.3% in the September quarter with a flat labour market in Auckland and falling full-time payrolls.
Economists have been sceptical of the latest reading, which has surprised them with three quarterly increases in the headline unemployment figure.
Firms trimmed 0.1 of a percentage point from their one-year forecast for annual gross domestic product growth to 2.1%and held two-year expectations at 2.3%.
The 90-day bank bill rate is expected to be 2.7% by the end of the year, rising to 2.8% by September 2013. The bill recently traded at 2.66%.
Firms predict the yield on the 10-year government bond will be 3.8% by September next year. The yield was recently at 3.54%.
The New Zealand dollar is expected to be 81 US cents by the end of March, falling to 80 cents by September, and is predicted to be 80 Australian cents by the end of September next year.
It recently traded at 82.24 US cents and 78.44 Australian cents.