KEY POINTS:
Business managers now believe inflation for the next two years will be right at the top of the Reserve Bank's 1 to 3 per cent target.
The latest survey of expectations commissioned by the Reserve Bank found inflation expectations for both the one and two-year horizons had increased since the last survey.
Average one-year-ahead Consumers Price Index (CPI) inflation expectations are now 3.3 per cent, an increase of 0.3 percentage points since the March quarter survey.
Two-year-ahead expectations are now 2.9 per cent, compared with a previous figure of 2.7 per cent.
The CPI actually rose 3.4 per cent in the year to March and the Treasury forecasts it to be 3.2 per cent in the year to March 2009.
Expectations of quarterly changes in the CPI for the next two quarters are little changed. Expectations for the June quarter CPI have risen slightly, from 0.8 per cent last quarter to 0.9 per cent this quarter and an increase of 0.7 per cent is expected for September.
These quarterly increases are equivalent to annual rates of 3.3 per cent for the year to June 2008 and 3.5 per cent for September.
On average, respondents continue to expect conditions to remain tighter than neutral over the survey period, suggesting they do not expect the Reserve Bank to cut interest rates.
A net 86 per cent of respondents believe conditions will be tighter than neutral at the end of September, but for March 2009 this figure falls to 53 per cent.
The business managers expect hourly earnings to increase 3.8 per cent in the year ahead and to have increased by a further 3.3 per cent in the following year.
The unemployment rate is expected to increase to 4.1 per cent by March and to 4.4 per cent by March 2010 from the current rate of 3.6 per cent.
Respondents' one-year-ahead economic growth expectations have fallen. For the year to March 2009 respondents expect GDP to increase by 1.4 per cent, compared with an increase of 1.8 per cent expected in the last survey. Just six months ago one-year-ahead GDP growth expectations stood at 2.3 per cent.
Two-year-ahead expectations, however, are unchanged at 2.2 per cent.
A quarter of those surveyed expect negative quarterly GDP growth in the June quarter.
The managers expect the NZ dollar to fall against the Australian and US dollars. An exchange rate of US74c is expected for the NZ dollar at the end of September, with this rate falling to US71c by the end of March 2009. The kiwi was at US79c yesterday.
Against the Australian dollar, the kiwi is seen at A80c by the end of March 2009 from A82.2c at present.
The 90-day bank bill rate is expected to be 8.5 per cent at the end of June, just below the current rate, but by March respondents believe the rate will have fallen to 7.7 per cent, suggesting they believe an official cash rate reduction will have taken place by that date.
- NZPA
