Hawkish tone more likely on inflation

Fairfax Media

HAWKISH: The odds of a more hawkish tone in the Reserve Bank's December monetary policy statement "just got higher", Westpac economists say.

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The odds of a more hawkish tone in the Reserve Bank's December monetary policy statement "just got higher", Westpac economists say.

They were commenting yesterday on a quarterly survey of expectations done for the Reserve Bank which showed business managers forecast annual inflation to average 2.1 per cent in the coming year, from 1.8 per cent in the August survey.

Two-year-ahead inflation expectations rose to 2.61 per cent from 2.25 per cent in the previous quarter.

The central bank forecasts inflation expectations around 2.2 per cent and falling. Instead they are heading for the upper limit of the 1 per cent to 3 per cent target for average inflation.

"The bank's oft-repeated expectation that '. . . inflation is expected to track comfortably within the target range over the medium term' now looks dubious," Westpac said.

Reserve Bank staff and advisers are meeting this week, ahead of the December 10 official cash rate review and monetary policy statement.

"The news that survey respondents are calling into question the bank's previous inflation forecast will no doubt provide substantial ammunition to the hawks around the meeting table," Westpac said.

The bank may be forced to raise the official cash rate sooner than the second half of 2010. Westpac is picking March 2010.

The survey also showed economic growth is expected to pick up, with gross domestic product rising 1.7 per cent in the coming year.

Over two years, growth is seen at 2.3 per cent, from 2 per cent previously.

New Zealand emerged from recession in the June quarter.

The survey of businesses showed a narrow majority holding the view that monetary conditions are on the easy side of neutral, which will continue through to next March, but become tighter than neutral by September 2010.

Wholesale short-term interest rates are expected to rise next year as the central bank starts to tighten policy, while long-term government bond yields also rise.

NZPA