- Dominick Stephens , Westpac New Zealand chief economist
Long term inflation expectations eased in New Zealand, suggesting the Reserve Bank of New Zealand may need to persuade people that price levels will return to the targeted level. The RBNZ inflation expectations survey showed that consumer prices were predicted to climb 1.85% annually over the next two years, compared with 1.94% in the June quarter. For the year to December 2016, inflation expectations increase slightly to 1.51%, from an expected 1.46% three months earlier. In contrast, New Zealand's costs of living rose only 0.4% year-on-year in the third quarter, according to Statistics New Zealand. Weak inflation expectations can lead to softer inflationary pressures as workers have less bargaining power at wage negotiations when the price level is not rising.
The central bank has an annual inflation target of 1-3%, yet inflation has been outside that band since the September-2014 quarter, and has not reached the 2% target midpoint in four years. According to the RBNZ's most recent forecasts, inflation is likely to hit the 2% target midpoint in the September-2016 quarter. In an attempt to underpin inflation the central bank has cut interest rates three times between June and September and recently signalled that further easing is possible. Most economists expect the cash rate to be cut to at least 2.5%, from 2.75% currently, with some forecasting a new record-low OCR of 2.0%.
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