Wheeler's eye back on inflation

Graeme Wheeler, governor of the Reserve Bank of New Zealand.

Expect to see the focus go back on inflation when Reserve Bank Governor Graeme Wheeler delivers his Monetary Policy Statement on Thursday, but don't expect to see any moves on interest rates for some time yet.

After inflation surprised on the upside in the March quarter, economists are expecting the RBNZ to revise its interest rate track closer to market expectations.

On Friday the RBNZ released the results of its survey of inflation expectations. It showed New Zealand firms lifting their expectations for inflation over the next two years above two per cent for the first time since 2015.

The market has priced in a rate rise for March next year while Reserve Bank's February forecasts indicated it might be late 2019 or even 2020 before the OCR is lifted from 1.75 per cent to 2 per cent.

"The RBNZ will have to acknowledge how conditions have changed in the last three months," Westpac's Michael Gordon noted in his preview.

But despite market expectations, economists at Westpac, ASB and KiwiBank are all picking the official cash rate is more likely to rise in late 2018.

"Since the February MPS we have seen both growth and inflation data which provide the RBNZ with new starting points for its forecasts," Kiwi Bank chief economist Zoe Wallis notes.

"The New Zealand economy expanded at a pace of 2.7 per year on year over 2016 - weaker than the RBNZ's forecast for growth of 3.5 per cent in quarter four of 2016."

But while growth weakened, inflation jumped to the highest level seen since 2011.

The headline CPI increased by 1 per cent for the quarter, taking annual inflation up to a pace of 2.2 per cent year on year.

The consensus of economists believe that the spike in inflation is short term and that it will ease slightly over the coming year without falling back out of the target band, below one per cent.

However economic growth is expected to stay strong with ASB's latest quarterly outlook picking the rate will top 3.5 per cent next year.

ASB sees consumer spending, migration and improving export volumes continuing to propel GDP growth from around 3 per cent through the rest of this year to 3.5 per cent by the middle of 2018.

However some headwinds remain.

Outside of Auckland and Wellington construction growth is expected to slow.

Elsewhere the economy is likely to bump up against capacity constraints.

The tourist sector was facing accommodation pressure which, despite increased investment in the hotel sector, would take several years to resolve.

The labour market was also tightening and ASB forecasts said it will continue to do so.

The unemployment rate dropped to 4.9 per cent in the March quarter and will fall to 4.6 per cent by December, according to the quarterly outlook.

"Employers are reporting increased difficulty in finding labour," the report says. "A tighter labour market will see wage inflation lift over the next three years."