BusinessDesk: NZ firms see more benign track for inflation and little need for RBNZ to hike Official Cash Rate

By Hannah Lynch

New Zealand companies have softened their inflation outlook for the fourth quarter, suggesting Reserve Bank governor Alan Bollard can keep interest rates low for longer.

The mean expectation for inflation one year out is 2.72 percent, according to the RBNZ survey of expectations, down from the 2.94 percent estimate in last quarter’s survey. The two-year series fell to 2.8 percent from 3 percent.

Businesses continued to trim their expectations for December with monetary conditions now regarded as being easier than neutral by a net 21 percent of those surveyed. By March 2012, a net 8 percent expect conditions to remain the same, with 10 percent expecting conditions to be tighter than neutral by September 2012.

“The continued easing in inflation expectations adds to the recent inflation indicators, which point to the RBNZ having breathing space on the inflation front,” said Christina Leung economist at ASB.

“There had been some concerns the high headline CPI may have flowed through to higher medium-term inflation expectations, influencing wage and price setting behaviour, but underlying inflation pressures appears contained for now,” she said.

The 90-day bank bill rate is seen at 2.8 percent by the end of December, down from 2.9 percent forecast three months earlier. By September next year the rate is expected to climb to 3.3 percent and the 10-year bond yield is seen at 4.8 percent.

Businesses see gross domestic product slowing to 2.1 percent in the year ahead, down from the last quarter’s expectation of 2.9 percent. The two-year ahead figure fell from 2.9 percent to 2.6 percent. That is against the backdrop of a slower time frame for the Christchurch rebuild.

The survey showed the kiwi dollar is expected to rise back up to 79 U.S cents before the end of March 2012, from its current level of 74.75 U.S cents. It may buy 78 Australian cents before the end of September 2012, from 75.68 cents now.

The survey polled 119 business managers.

ASB Economist Christina Leung's reaction:

The continued easing in inflation expectations adds to the recent inflation indicators, which point to the RBNZ having breathing space on the inflation front. There had been some concerns the high headline CPI may have flowed through to higher medium-term inflation expectations and affect wage and price setting behaviour, but underlying inflation pressures appears contained for now.

The European debt crisis continues to dominate the RBNZ outlook, and these results add to recent developments which indicate little urgency to raise the OCR. We expect the RBNZ will keep the OCR on hold until at least June 2012, in order to assess the effects of global developments on the NZ economy.

(BusinessDesk)

(Updated with ASB Economist's reaction)