Inflation, interest rate expectations edge higher in RBNZ survey

Christina Leung, ASB economist

New Zealand inflation is expected to edge,up over the coming year and lead to higher interest rates as the economy gathers momentum, according to the Reserve Bank's latest quarterly survey.

The consumers price index is seen rising to 2.08 percent over the coming year and 2.36 percent in the next two, up from 2.03 percent and 2.33 percent respectively, the survey of business managers, conducted by ACNeilson for the Reserve Bank, shows. Inflation is running at an annual pace of 1.5 percent in the March quarter. The central bank kicked off a tightening cycle in March, hiking the official cash rate twice to 3 percent in a bid to cool the threat of building inflation.

A net 40 percent of the survey's respondents see current monetary conditions as being easy, down from a net 57 percent in the March quarter, and a net 21 percent see tighter than neutral conditions by the end of March next year. The 90-day bank bill rate, often used as a benchmark to forecast the track of the OCR, is expected to be 3.5 percent by the end of June, rising to 4.1 percent by March next year.

"The latest RBNZ Survey of Expectations indicates businesses expect only a modest increase in inflation over the next couple of years," ASB economist Christina Leung said in a note. "While this will likely flow through to a lift in underlying inflation pressures, we expect this lift will be modest relative to the ramp-up in activity expected given the increased capacity of the NZ economy."

The survey shows economic growth is expected to be 3.3 percent in the year ahead, up from 3.2 percent in the previous quarter and 2.9 percent two years out. The Treasury raised its economic outlook, forecasting gross domestic product to grow 3 percent in the year ended March 31, 2014, before peaking at a decade-high 4 percent in 2015.

Business managers see faster earnings growth in the coming year, with hourly wages rising at a 2.9 percent pace in the year ahead and 3.1 percent in the two-year series. They had previously seen earnings growth of 2.6 percent and 2.9 percent in the one- and two-year horizons. Unemployment expectations were largely unchanged, with respondents predicting the jobless rate will fall to 5.6 percent in the coming year, and 5.3 percent two years out, from the current 6 percent.

(BusinessDesk)

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