What will Reserve Bank do as New Zealand inflation expectations rise?

Expectations for inflation one year out rose to 1.56 percent compared to 1.29 percent in the Reserve Bank's last survey

New Zealand inflation expectations for the next two years have increased, a Reserve Bank survey shows, probably adding to the view that the central bank may lift its projected track for interest rates in Thursday's monetary policy statement.

Expectations for inflation one year out rose to 1.56 percent compared to 1.29 percent in the Reserve Bank's last survey three months ago. The two-year ahead figure rose to 1.92 percent from 1.68 percent.

The Reserve Bank releases its monetary policy statement on February 9 and is expected to hold the official cash rate steady at 1.75%. Speculation has been growing, however, that recent signs of inflation may lead it to be slightly more hawkish. New Zealand's central bank is fairly unique globally in that it publicly forecasts where it expects interest rates to go over a three-year period. In November, it cut rates by 25 basis points to 1.75% and forecast they would remain at that level until the end of 2019.

However, the consumers price index rose 0.4% in the three months ended December 31 for an annual pace of 1.3%, moving back into the central bank's 1-3% target range for the first time in two years. That, coupled with higher inflation expectations, may lead it to signal an eventual rate hike. Most economists are expecting a rate hike at some time in 2018.

The 90-day bank bill rate, seen as a proxy for the OCR, is expected to be 2.02 percent at the end of March 2017 and increase to 2.22 percent by the end of December 2017. The rate was 1.97 percent when the survey was taken, the Reserve Bank said.

Expectations for gross domestic product also continued to push higher. Year-ahead real GDP growth is seen jumping to 3.11% from 2.75% in the previous survey, while the two-year-ahead rate was lifted to 2.88% from 2.51%. That's still slower than the 3.6% pace in the year ended September.

The unemployment rate rose to 5.2 percent in the fourth quarter but is expected to be 4.79 percent in a year's time and 4.84 percent in two years. Expectations for wage growth decreased to an annual pace of 2.14 percent one year out versus 2.25 percent in the prior survey. Two-year ahead growth expectations fell to 2.39 percent from 2.48 percent.

The kiwi dollar, meanwhile, is expected to fall back to 70USc  by the end of June 2017 from a current 73.55. The rate is expected to be 68USc  by December. The local currency is seen at 94Ac cents by the end of June and to remain the same at the end of December. It is trading at 96.12Ac now.


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