RBNZ inflation expectations

New Zealand Economic Update
RBNZ inflation expectations

The RBNZ reported today that inflation expectations fell in the June quarter, but only modestly. The 67 business managers surveyed by the RBNZ expect inflation to average 2.2%oya in two years’ time, only slightly lower than the 2.3% recorded in 1Q09 and 2.7% in 4Q08. A sharper fall was recorded in expectations of inflation in one years’ time, which those surveyed expect to average 1.8%oya, down from 2.2% in the March quarter and 2.8% in 4Q08.

With the economy already having recorded four straight quarters of negative growth (we expect at least another two), it’s not surprising that inflation expectations have been tempered. Actual headline inflation, on our forecasts, will moderate significantly throughout 2009, and fall back within the RBNZ’s 1-3%oya target range in the current quarter. In the March quarter, headline inflation was at 3%oya.

With all that in mind, and the domestic economy still soggy, we maintain our forecast that the RBNZ will cut the OCR 25bp to 2.25% on June 11. The Deputy Governor recently defended monetary policy as a means to lift the economy out of recession and reinforced that there is still “potential scope for monetary policy leverage.” One reason, though, that RBNZ Governor Bollard may choose to leave the cash rate unchanged next month is a desire to preserve monetary policy power for use later on, particularly when the unemployment rate is soaring. With this in mind, a case can be made for the RBNZ to refrain from delivering further policy support until the latter six months of the year.

RBNZ Inflation Expectations (pdf)

ENDS

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