Lower inflation expectations making it easier for RBNZ to keep OCR low

Annual headline inflation (CPI) is expected to be 1.8% in one year's time, and 2.2% by this time in 2011, the Reserve Bank of New Zealand June Quarter Survey of Expectations showed. Both expectations were down from the previous March quarter survey. For the second quarter in a row, one-year CPI expectations were lower than two-year expectations. The March quarter survey was the first since 2004 in which this was the case. RBNZ Governor Alan Bollard indicated at the end of April that the Official Cash Rate will remain at or below 2.50% for 18 months. The danger facing such a policy would be rising inflation, but with headline inflation expected to sit within the RBNZ's 1-3% target band over the next two years, the latest survey suggests it will easier for the RBNZ to keep its promise. The survey of 67 business managers around the country also showed that the NZ$/US$ exchange rate was expected to be around 57 US cents at the end of September, and the NZ$/AU$ exchange rate to be around 79 Australian cents. The US$ exchange rate is currently above 62 USc, with the AU$ exchange rate sitting at 79 AU cents. The economy's recessionary woes are still expected to continue over the next year, with one-year GDP growth expectations of a fall of 0.2%. However, the situation is expected to improve in the year after that, with GDP growth for the year to March 2011 expected to be 1.2%. GDP is expected to fall 0.3% in the March quarter this year and 0.2% in the June quarter. Unemployment is expected to be at 6.8% by March 2010, before improving slightly to 6.5% by March 2011. The RBNZ said there were suggestions from the latest survey that further OCR reductions were not greatly anticipated, with 90 day bank bill rates expected to be 2.8% at the end of June, and 2.9% in March 2010. The rate is currently around 2.8%.