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Inflation expectations rose in New Zealand in 3Q

Inflation expectations rose in New Zealand in 3Q

According to the RBNZ, inflation expectations rose in New Zealand in the September quarter. The survey of 76 business managers showed that inflation is expected to average 3.0% in two years' time, compared to 2.9% in the previous survey, remaining elevated at the very top end of the RBNZ's 1-3% target range. The survey also showed that inflation in one years' time is expected to average 3.6%, up from 3.3% in the 2Q survey.

The NZ dollar has fallen 6% vis-Ã -vis USD since mid-year, countering the impact of falling global crude prices on Kiwi inflation. For this reason, alongside the recent PPI print (which indicated that pipeline price pressures remain significant), we expect headline inflation to peak at 5.2% in 4Q. The RBNZ expects headline inflation to peak at 5%oya in 3Q.

Inflation should, however, ease back within the RBNZ's target in the medium term as the weaker economy reduces pressure on resources, "making it more difficult for firms to pass on costs and for higher wage claims to be agreed," according to RBNZ Governor Alan Bollard.

With respect to monetary policy, even though inflation remains elevated, we expect a further three rate cuts this year to help prop up the Kiwi economy, which currently is in recession. Our forecast calls for the OCR to be 7.25% by year-end.

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