Inflation expectations show modest uplift in next two years

Reserve Bank governor Graeme Wheeler

New Zealand inflation expectations for the next two years have increased, a Reserve Bank survey shows, in an economy that respondents believe will pick up pace.

Expectations for inflation one year out rose to 1.29% compared to 1.26% in the Reserve Bank's previous survey of expectation three months ago. The two-year ahead figure edged up to 1.68% from 1.65%, although this was little changed for a third straight quarter.

The Reserve Bank releases its monetary policy statement on November 10 and is expected to cut the official cash rate a quarter point to 1.75%. Based on its August MPS, annual inflation of 0.2% in the third quarter was a low point, with the consumers price index seen rising to 1% on an annual basis, the bottom end of the central bank's target range, in the fourth quarter.

The 90-day bank bill rate, seen as a proxy for the OCR, is expected to be 2% by the end of 2016 and be little changed by September 2017. The rate was 2.13% when the survey was taken, the Reserve Bank said. Expectations for gross domestic product showed a more marked changed from three months ago.

Year-ahead real GDP growth is seen speeding to 2.75% from 2.52% in the previous survey, while the two-year-ahead rate was lifted to 2.51% from 2.43%. That's still slower than the 3.5% pace in the year ended June 30.

The unemployment rate fell to 4.9% in the third quarter and is expected to be 5.1% in a year's time and 5.06% in two years. Expectations for wage growth picked up to an annual pace of 2.25% one year out and 2.48% in two years, from 2.08% and 2.33% in the September survey. Based on private sector ordinary time wages, wage inflation was unchanged at 1.6% in the third quarter, figures today showed.

The kiwi dollar is expected to fall back to 70USc by the end of March next year, from 72.08USc currently and to reach 68USc by September next year. The local currency is seen at 93Ac on March 31, from 94.56Ac now.


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