Firms see looser monetary conditions at end of quarter, one year out

New Zealand businesses expected monetary conditions to be looser by the end of the third quarter and one year out, compared to their expectations three months ago, the Reserve Bank's latest survey shows.

Asked for their perception of where monetary conditions will be at the end of the quarter, a net 48.4% expected conditions to be looser, implying a decline in interest rates. In the June survey, a net 36.8% saw looser conditions by quarter-end. For the end of the fourth quarter, a net 62.9% of those polled saw more stimulatory monetary policy in the latest poll, up from 42.1% in June and one year out those seeing looser conditions rose to 56.5% from 42.1%.

The Reserve Bank cut the official cash rate a quarter point on June 11 and July 23, bringing the rate to 3%. There is a 78% chance the bank will cut the rate again at its September 10 meeting, based on traders' bets, and 38 basis points of cuts are seen over the next 12 months based on the overnight interest swap curve.

Inflation expectations haven't moved much in the past three months. The consumers price index is expected to rise 0.36% in the end of the current quarter and 0.31% next quarter, compared with 0.32% and 0.41% respectively, in the June survey. Annual inflation one year out is seen at 1.46%, from 1.32% in June, and for two years out at 1.94%, from 1.85%.

"The closely watched two-year-ahead measure of inflation expectations ticked up very slightly in Q3 and appears to be stabilising close to the Reserve Bank's 2% target mid-point," ASB economist Jane Turner said in a note. "There are limited implications for the market – particularly given the current focus is on offshore financial market volatility. Meanwhile, we continue to expect the Reserve Bank to cut the OCR to 2.5% by October in light of the downside risks to growth and inflation."

Household expectations for inflation were also not much changed. Current inflation was seen at an annual median 2%, unchanged from June, while one-year ahead inflation rose to 2.2% from 2%. The net percentage of those polled expecting house prices to rise eased to 70.4% from 75.2%.

(BusinessDesk)