NZ businesses lift one and two-year inflation expectations, see slower GDP track

New Zealand firms lifted their expectations for inflation over the next two years, with the consumers price index seen firmly returning to the Reserve Bank's target level, but they also dialled back expectations for economic growth and see a weaker kiwi dollar.

The Reserve Bank's survey of expectations showed respondents see annual inflation one year out at 1.92 percent, up from the 1.56 percent rate seen in the last survey three months ago, while the two-years-ahead rate is seen at 2.17 percent, up from 1.92 percent.

The kiwi dollar rose after the survey was released to 68.83 US cents from 68.67 cents immediately before. The currency has fallen from a high of 73.74 cents on Feb. 7.

The survey comes a week before the Reserve Bank is scheduled to release its monetary policy statement, having kept the official cash rate unchanged at 1.75 percent in its February MPS and signalled only one quarter-point increase by the end of its forecast horizon in the first quarter of 2020. Data this week showed wage inflation is running at a subdued 0.4 percent as migrants help flood the jobs market and keep wage pressures low.

"We expect the Reserve Bank to hold the OCR at 1.75 percent next week," said Satish Ranchhod, senior economist at Westpac Banking Corp. "However, with the inflation environment looking firmer than it has been for the past few years, the RBNZ is likely to give a stronger signal that the next move in interest rates will be up. We expect the RBNZ's interest rate projections to be more consistent with an OCR hike by late 2018."

Firms trimmed their expectations for economic growth, on an annual real gross domestic product basis to 2.81 percent for the year ahead from 3.11 percent and to 2.58 percent in two years' time from 2.88 percent in the last survey. Growth on that basis was 2.7 percent in calendar 2016. The jobless rate is seen holding around current levels, edging up to 5.1 percent in one year's time and slipping back to 4.9 percent two years' hence, the same level it was in the first quarter of this year.

Wages growth is expected to pick up, though. Annual wages growth one year ahead is seen at 2.41 percent, up from 2.14 percent in the previous survey three months ago, and to 2.71 percent in two years, from 2.39 percent.

The New Zealand dollar is expected to be at 69 US cents at the end of September this year, down from the 70 cent level in the previous survey. By the end of march 2018, it is expected to have slipped to 68 cents.

The survey was conducted from April 21-24.

(BusinessDesk)