New Zealand’s inflation expectations rise sharply, RBNZ likely to keep OCR on hold

New Zealand’s inflation expectations as gauged by the Reserve Bank of New Zealand’s quarterly survey rose sharply in the first quarter, accelerated to 1.92 percent from 1.68 percent. It is quite close to the 2 percent mid-point of the central bank’s inflation target range and the highest level since 2014. Projections for one year ahead, which is less significant to the central bank’s policy horizon, also accelerated to 1.56 percent to 1.29 percent.

Inflation expectations are a constant concern for the central bank as they have a considerable influence on how businesses adjusted prices and wages. Low level of headline inflation led to expectations dropping to low levels in recent years. However, the rise in the expectations seen today might be a welcome development. This follows December’s acceleration in headline inflation above 1 percent for the first time in two years.

In the central bank’s last policy statement, the risk of expectations falling further was underlined as a major concern. However, while the risks around this part of the policy environment might have waned, headline inflation stays at relatively low levels. Moreover, the return to 2 percent might take some time with imported inflation likely to stay modes, noted Westpac in a research report. Meanwhile, the rises in population and the economy’s productive capacity are permitting GDP to expand at a strong rate without a considerable rise in domestic-led cost pressures.

“With this in mind we expect that the RBNZ will keep the OCR unchanged this Thursday when it releases its February Monetary Policy Statement. We also expect that they will retain the neutral stance of its November statement”, added Westpac.

At 04:00 GMT the FxWirePro's Hourly Strength Index of New Zealand Dollar was bullish at 92.0533, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 49.237. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex