NZ inflation expectations slump to lowest in more than 20 years

New Zealanders' perceptions of inflation have become even more subdued, adding to the case for a further interest rate cut by the Reserve Bank.

The Reserve Bank Survey of Expectations shows respondents see annual inflation one year out at 1.09%, down from the 1.51% rate seen in the last survey three months ago. Expected inflation in two years' time has been lowered to 1.63% from 1.85%.

That's the lowest level of expectations since 1994, according to Westpac Banking Corp, and follows similar declines in market-based measures of inflation. The survey shows inflation at the end of the current quarter is seen at 0.2%, down from 0.29% three months ago, while for next quarter, the rate was lowered to 0.33% from 0.46%.

The New Zealand dollar dropped about half a US cent, to 66.11USc  from 66.63USc after the survey was released, on speculation the case for a further rate cut is building. Westpac chief economist Dominick Stephens says a cut in March "is a live possibility," although it expects a move in June.

Mr Stephens says the survey calls into question the central bank's argument that it can tolerate an extended period of extremely weak inflation because it views the phenomenon as temporary and expects monetary policy to drive inflation back to the 2% mid-point of its target band in the future.

"A crucial piece of evidence in the Reserve Bank's argument has been that inflation expectations remained close to 2%, even when inflation was low," he said. "Falling inflation expectations across market and survey-based measures are now calling that argument into question. Low inflation expectations may start to impact wage claims and price setting behaviour, in turn leading to even greater downward pressure on inflation."

The 90-day bank bill rate is seen at 1.62% at the end of the current quarter, down from 2.79% in the previous survey. One year out the rate is seen at 2.52%, down from 2.79%. Still, quarterly economic growth is seen slightly more buoyant, at 0.65% for the previous quarter, up from 0.49% three months ago, and 0.58% in the current quarter, up from 0.5%.

(BusinessDesk)