N.Z. Inflation Expectations Rise, Damping June Rate-Cut Bets

Updated on
RBNZ Governor Graeme Wheeler
Graeme Wheeler, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg

An increase in New Zealand inflation expectations damped bets on the central bank cutting interest rates as soon as next month and drove up the nation’s dollar.

The expected rate of inflation two years ahead rose to 1.85 percent from 1.8 three months ago, according to a survey of businesses and analysts published by the Reserve Bank of New Zealand in Wellington on Tuesday. The year-ahead expectation rose to 1.32 percent from 1.11 percent, the RBNZ said.

Governor Graeme Wheeler has said he would consider cutting the benchmark rate from 3.5 percent if near-zero headline inflation starts to weigh on the outlook and change price-setting behavior. The chance of a June cut fell below 50 percent on today’s survey from as high as 58 percent yesterday, according to swaps data compiled by Bloomberg. The kiwi dollar jumped more than half a U.S. cent to 74.36 cents.

“It does suggest there’s no urgency for a rate cut in June,” said Jane Turner, senior economist at ASB Bank Ltd. in Auckland, who still expects two reductions later this year. “Inflation expectations won’t be the only measure the Reserve Bank is looking at when assessing price stability.”

Falling dairy prices are curbing farm incomes and threatening to slow economic growth. The annual inflation rate has slumped to 0.1 percent and the central bank doesn’t expect it to return to its 2 percent target until late 2017.

Auckland Measures

Bets on rate cuts increased over the past week after the RBNZ and the government announced measures to cool Auckland’s housing market, potentially removing one of the obstacles to lower borrowing costs.

Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland, said market reaction to today’s data “reflected an undue focus on the mean two-year ahead inflation expectation,” and ignored weaker wage growth forecasts in the survey. Expectations for annual wage increases one year ahead fell to 2.2 percent, the lowest since mid-2010.

Those data, as well as a weaker economic growth outlook and continued “benign” inflation expectations “sit well with our assessment that the RBNZ will see scope to ease the OCR over the next two meetings,” Gibbs said.

The central bank’s next rate decision is on June 11, when it will also publish updated economic and inflation forecasts.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE