Inflation expectations edge higher in latest Reserve Bank survey

Expectations for inflation one year out rose to 1.22% from 1.09% in the previous survey.

New Zealand inflation expectations rose slightly in the Reserve Bank's latest quarterly survey, after the previous survey's surprisingly weak outcome, and remained well below the mid-point of the central bank's target range.

Expectations for inflation one year out rose to 1.22% from 1.09% in the previous survey, which was the lowest reading since 1994, while the two-year ahead figure barely budged at 1.64% from 1.63%.

Today's survey was closely watched because the Reserve Bank cut the official cash rate to 2.25% within three weeks of the last survey, published on February 16, which showed dwindling expectations for price pressures. Traders and economists are now trying to gauge the likelihood of an OCR cut at the June 9 monetary policy statement, with some saying governor Graeme Wheeler may be prepared to wait until August while he considers further measures to cool a resurgent housing market.

"The Reserve Bank will be somewhat uncomfortable with the lack of pick-up in two-year inflation expectations, as well as falling longer-term expectations," said Kate Mundy, an economist at ASB Bank. "We continue to expect the Reserve Bank will cut the OCR again in June and August, with risks slightly skewed to a later move."

Mr Wheeler stopped short of announcing any specific new measures to tackle heat in the housing market, which has spilled over from Auckland into other regions in the six-monthly Financial Stability Report last week but said the central bank is "closely monitoring developments to assess whether further financial policy measures would be appropriate." The central bank said it was considering a new loan to income restriction but gave no timetable for introducing such a measure.

The survey showed expectations fell for the 90-day bank bill rate both for the end of the current quarter and one year out to 2.27% and 2.23%, from 2.62% and 2.52% respectively three months ago. Annual gross domestic product one-year out is seen at 2.24%, down from 2.43% in the previous survey. The two-year-out rate fell to 2.33% from 2.56%.

Firms surveyed see the kiwi dollar at 65.90USc next quarter, up from an expectation of 63.2USc in the previous survey. The kiwi is seen at 65.5USc one year out, up from 62.1USc.

The kiwi fell after the survey was released, to trade recently at 68.05USc, having climbed to 68.33USc immediately before.


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