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RBNZ Survey Shows Higher Inflation Expected in the Next 2 Years

RBNZ Survey Shows Higher Inflation Expected in the Next 2 Years

2011-05-24 03:58:00
David Liu, DailyFX Research,
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The Reserve Bank of New Zealand’s survey of company executives during the second quarter showed higher inflation expectations. According to the 75 executives in the survey, overall inflation will average 3% in the period of two years. The previous expectation for first quarter conducted in February showed an average expectation of 2.64%.

The RBNZ report also showed better sentiment for the NZ economy, as two-year average annual GDP was expected to grow at 2.8% versus 2.6% in first quarter’s survey, most likely due to increased trade with Australia and China. Outlook for the NZDUSD in one year also increased from 0.751 the previous quarter to 0.764 this quarter.

However a key indicator comes from the notion of a recovering labor market. Two-year hourly wages is forecasted to average 3.0% growth compared to 2.9%, while the unemployment rate is expected to drop from 5.8% to 5.7%.

The stronger inflation outlook provided a boon for the New Zealand dollar against the greenback, drawing a strong 50 pip gain after the report, adding onto gains from US dollar weakness this earlier this morning. Investors are taking the data as an early indication of a more robust New Zealand economy, along with more hawkish views that the central bank will raise its official cash rate, currently set at 2.50%.

RBNZ_Survey_Shows_Higher_Inflation_Expected_in_the_Next_2_Years_body_Picture_4.png, RBNZ Survey Shows Higher Inflation Expected in the Next 2 Years

NZDUSD 5 minute chart; vertical line indicates data release. Chart generated with FXCM Strategy Trader.

Even with this report giving ammunition to those calling for higher rates, a stronger Kiwi dollar may not be the best for the New Zealand economy. Earlier today, Finance Minister Bill English commented that the strong NZD is a “headwind” for the national economy, and that low rates will probably persist longer than in Australia. Additionally, the current government is trying to create a government budget surplus by 2015, and may further dampen New Zealand output.

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