Inflation expectations creep higher in June survey; Kiwi gains

New Zealand businesses lifted their expectations for inflation over the next two years, sapping any immediate pressure on the Reserve Bank to cut interest rates, and prompting the kiwi dollar to jump higher.

The consumers price index is seen rising an annual 1.32% on a mean basis in the year ahead, up from the 1.11% pace seen in the March quarter, while two-year ahead inflation expectations increased to 1.86% from 1.8% three months earlier, according to the Reserve Bank’s survey of expectations. The kiwi dollar climbed half a US cent, and recently traded at 74.15USc from 73.68USc immediately before the release.

Traders have been ramping up their bets the central bank will cut interest rates after governor Graeme Wheeler dropped his tightening bias earlier this year in the face of slow global inflation, and recent efforts by the Reserve Bank and government to curb demand in the Auckland property market were seen as providing more room for the 3.5% official cash rate to be cut at next month's monetary policy review.

Despite the higher inflation expectations, respondents in the survey see a slightly lower 90-day bank bill rate, often seen as a proxy for the OCR, with it forecast to be at 3.6% at the end of the current quarter, down two basis points from the March quarter, and unchanged in the year ahead, compared to 3.67% predicted three months earlier. Ten-year government bonds are seen to end the current quarter at 3.51%, up 10 basis points from the March quarter, and seven basis points lower in the year-ahead projection at 3.62%.

Respondents to the survey see slower annual gross domestic product growth of 2.57% in the year ahead, down from 2.75% three months earlier, while expectations for the two-year horizon fell to 2.35% from 2.51%.

The labour market outlook dimmed, with respondents seeing the unemployment rate at 5.49% in the year ahead, up from 5.36% in the previous survey, and two-year expectations at 5.4% compared to 5.25%.

Wages are picked growing at a slower pace than previously predicted, with one-year growth seen at 2.18% and two-year growth of 2.46%, compared to 2.27% and 2.55% in the March survey.

The kiwi dollar is expected to be trading at 73.40USc in the next quarter, falling to 71USc over the next year, and is predicted to be trading at 95Ac in the next quarter before dropping to 92.90Ac cents in a year's time.

(BusinessDesk)