- Benjamin Reitzes, BMO senior economist
Inflation expectations in New Zealand picked up, dampening bets on the RBNZ trimming interest rates as soon as next month. New Zealand businesses expected the consumer price index to rise 1.85% annually over the next two years, compared with the 1.80% estimate three months ago. The year-ahead expectation climbed to 1.32% from 1.11%, according to the RBNZ. The central bank targets inflation between 1%-3% annually; however, consumer prices climbed only 0.1% year-on-year in the first quarter, data released by Statistics New Zealand showed last month, marking the second-straight quarter that the consumer inflation has come in below the RBNZ's target band. Governor Graeme Wheeler said he would consider cutting the benchmark rate from 3.5% if near-zero headline inflation begins to weigh on the outlook and alter price-setting behaviour. Inflation expectations are usually one of the main drivers influencing wage negotiations. Hence the RBNZ is worried that soft inflation settings will impact future expectations, and then have a bearing on wage settings. This could then lead to a deflationary spiral if inflation turns negative. The RBNZ's new easing bias led most economists to argue that the central bank will trim interest rates this year, with few signs that inflation is going to pick up any time soon. Yet, following today's data on inflation expectation, the chance of a June cut declined below 50% from as high as 58% a day earlier.
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