Source: Radio New Zealand
Inflation is expected to hit 3.41 percent in the year ahead, from 2.59 percent forecast in the previous survey. RNZ / Quin Tauetau
- RBNZ survey shows a more pessimistic view of the economy
- Weaker growth, higher inflation and unemployment, and a cash rate rise are expected in the near term
- Key two-year inflation outlook rises to 2.53 percent, but stays in target band
- Survey was taken of select economists and business leaders in late April
- RBNZ attaches importance to survey
The Middle East conflict has soured economic forecasters’ and business leaders’ views on the economic outlook for the coming year.
The quarterly survey done for the Reserve Bank (RBNZ) showed expectations that the economy will have stronger inflation, higher interest rates and unemployment, and weaker growth.
Inflation is expected to hit 3.41 percent in the year ahead, from 2.59 percent forecast in the previous survey in March.
The two year inflation forecast, which the RBNZ follows closely because it’s assumed to be the most influenced by monetary policy moves, rose to 2.53 percent from 2.37 percent.
The current inflation rate to the end of March was 3.1 percent.
Five and 10-year inflation forecasts were lower than the March survey and showed inflation staying well fixed in the 1-3 percent target band.
RBNZ governor Anna Breman has stressed that inflation expectations will be an important factor in setting the official cash rate (OCR).
Economic growth to slow, OCR to rise
The survey’s respondents expected gross domestic product (GDP) – the broad measure of economic growth – to slow over the next two years.
The forecast for this year was 1.58 percent from 2.03 percent in the March survey. The two year forecast was trimmed to 2.16 percent from 2.3 percent.
The one-year OCR expectation rose to 3.01 percent from 2.58 percent.
The RBNZ issues its next monetary statement on 27 May, with financial markets pricing in a 50 percent chance of a 25 basis point rise in the OCR to 2.5 percent at that meeting.
Economists are generally forecasting the first rate rise between July and September, with a broad view the OCR will be sitting around 3.0 percent by year end.
No smoking gun
ASB senior economist Mark Smith said the RBNZ will be reassured by the figures, but will want them backed by other surveys and pricing data.
He said the fall of the five and 10 year inflation forecasts to closer to the 2 percent mid-point in the target band would offer some cheer to the RBNZ, but in the near term interest rate hikes to counter the inflation spike caused by the conflict were inevitable.
“OCR hikes are a matter of when and not if.
“If evidence points to a generalised and persistent uplift in inflation emerging, more proactive monetary normalisation is warranted, particularly with a troublesome short-term inflation outlook and with the 2.25 percent OCR below circa 3.25 percent neutral levels,” Smith said.
“If not, the RBNZ will probably wait but they run the risk of having to undertake a more protracted tightening cycle if they fall behind the curve.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand