NZ inflation expectations at lowest in 14 years

New Zealand inflation expectations have fallen to the lowest in 14 years, even as business managers raised their expectations for economic growth, suggesting the central bank will not have to rush to raise interest rates.

Annual inflation is expected to average 1.52 percent in the coming year, the lowest since June 1999 and down from the 1.68 percent pace seen in the first quarter survey. The quarterly survey of business managers and professionals is conducted for the Reserve Bank by research firm Nielsen.

Inflation two years out is seen at 2.06 percent, the lowest since December 1999, from 2.17 percent three months earlier. That is near the central bank's target of keeping inflation at the mid-point of its 1 percent-to-3 percent range on average over time.

Traders are expecting 18 basis points of increase in the 2.5 percent official cash rate over the next 12 months, based on the Overnight Index Swap curve.

"Inflation expectations are further confirmation that inflation pressures are very subdued and not an immediate concern for the RBNZ," says Jane Turner, economist at ASB. "From an inflation targeting perspective, this is a very comfortable position for the RBNZ to be in."

At the time of the survey, a net 32 percent of those polled believed monetary conditions were easier than neutral, down from 37 percent in the first quarter. By March 2014, that number has whittled down to a net 14 percent, the survey shows.

Expectations of real annual growth in gross domestic product one year ahead rose to 2.5 percent from 2.3 percent last quarter, while the two year ahead expectations rose to 2.8 percent from 2.6 percent.

Positive quarterly growth of 0.5 percent is seen in the March and June quarters of this year. That is below the central bank's March forecasts of 0.6 percent and 0.7 percent, respectively.

Hourly earnings expectations were little changed at 2.3 percent one year ahead and 2.6 percent two years ahead. Unemployment is seen falling to 6.4 percent in a year and to 6 percent in two years.

The 90-day bank bill rate is expected to be 2.7 percent at the end of June and 2.9 percent by March 2014. The 10-year bonds are seen at 3.7 percent by March next year.

The New Zealand dollar is expected to be at 84 US cents at the end of September this year and to have slipped to 83 cents by March 2014.

(BusinessDesk)