Inflation expectations fall sharply

Inflation expectations have fallen sharply while expectations of economic growth are little changed, according to the Reserve Bank's latest survey.

Tuesday, February 21st 2012, 10:31PM

by Jenny Ruth

The survey outcome reinforces the likelihood that the central bank will keep interest rates on hold for an extended period – most economists are forecasting until at least December.

Two-year-ahead expectations of annual inflation now stands at 2.5%, down from 2.8% in the last survey in November, while the mean of one-year-ahead expectations fell to 2.24% from 2.72%.

“The Reserve Bank will be pretty pleased to see them (expectations) drop across the board, particularly that two-year-ahead one,” says Doug Steel, an economist at Bank of New Zealand.

“If they hadn't come off with such a hefty drop in the headline CPI (consumer price index), I think it would have had alarm bells ringing at the Reserve Bank,” Steel says.

The CPI rose 1.8% in calendar 2011, down from 4.6% in the year ended September 2011.

While it may be reading too much into the release, the central bank's choice of language such as “dived” and “tumbled” could be an indicator of how keen it was to see inflation expectations coming down, Steel says.

Jane Turner at ASB Bank says two-year-ahead expectations of inflation are now at their lowest level since 2009.

While the big drop in the actual CPI may have prompted many to reassess underlying inflation pressures, “nonetheless, the extent of the decline in expectations is somewhat surprising, given in two years we would expect that rebuilding activity in Canterbury to be driving a pickup in construction prices and see inflation rising back toward the higher end of the Reserve Bank's target band,” Turner says.

“The Reserve Bank has plenty of breathing space around this future pickup inflation as the survey suggests that wage and price-setting behaviour remains well contained for now.”

Respondents expect annual economic of growth of 2.1% over the next 12 months and 2.6% over the next two years.

The latest quarterly survey of business managers was conducted for the central bank by the Nielsen Company on February 8 and 9.

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