NZ inflation expectations creep higher in June survey; kiwi gains

The consumers price index rose 0.4 per cent in the three months ended June 30, turning around two quarters of deflation - in line with the Reserve Bank's forecasts. Photo / Chris Gorman

New Zealand businesses lifted their expectations for inflation over the next two years, sapping any immediate pressure on the Reserve Bank to cut interest rates, and prompting the kiwi dollar to jump higher.

The consumers price index is seen rising an annual 1.32 per cent on a mean basis in the year ahead, up from the 1.11 per cent pace seen in the March quarter, while two-year ahead inflation expectations increased to 1.86 per cent from 1.8 per cent three months earlier, according to the Reserve Bank of New Zealand's survey of expectations.

The kiwi dollar climbed half a US cent, and recently traded at 74.15 US cents from 73.68 cents immediately before the release.

Traders have been ramping up their bets the central bank will cut interest rates after governor Graeme Wheeler dropped his tightening bias earlier this year in the face of slow global inflation, and recent efforts by the Reserve Bank and government to curb demand in the Auckland property market were seen as providing more room for the 3.5 per cent official cash rate to be cut at next month's monetary policy review.

Despite the higher inflation expectations, respondents in the survey see a slightly lower 90-day bank bill rate, often seen as a proxy for the OCR, with it forecast to be at 3.6 per cent at the end of the current quarter, down 2 basis points from the March quarter, and unchanged in the year ahead, compared to 3.67 per cent predicted three months earlier.

Ten-year government bonds are seen to end the current quarter at 3.51 percent, up 10 basis points from the March quarter, and 7 basis points lower in the year-ahead projection at 3.62 per cent.

Respondents to the survey see slower annual gross domestic product growth of 2.57 per cent in the year ahead, down from 2.75 per cent three months earlier, while expectations for the two-year horizon fell to 2.35 per cent from 2.51 per cent.

The labour market outlook dimmed, with respondents seeing the unemployment rate at 5.49 per cent in the year ahead, up from 5.36 percent in the previous survey, and two-year expectations at 5.4 per cent compared to 5.25 per cent.

Wages are seen growing at a slower pace than previously predicted, with one-year growth seen at 2.18 per cent and two-year growth of 2.46 per cent, compared to 2.27 per cent and 2.55 per cent in the March survey.

The kiwi dollar is expected to be trading at 73.40 US cents in the next quarter, falling to 71 cents over the next year, and is predicted to be trading at 95 Australian cents in the next quarter before dropping to 92.90 cents in a year's time.