Businesses and households expect subdued inflation

Subdued inflation expectations among both businesses and households reinforce perceptions interest rates won't be going up any time soon.

Tuesday, August 21st 2012, 4:07PM

by Jenny Ruth

Business expect inflation in two years time will be 2.32%, down from 2.41% three months ago, while economic growth is also expected to be lower than previously thought, according to the Reserve Bank's latest survey.

"Inflation expectations at the two-year ahead level are at a three-year low," says Darren Gibbs, an economist at Deutsche Bank.

Gibbs adds that households' inflation expectations one-year ahead at 3% are also at their lowest level since 1999. "Maybe households are finally convinced low inflation is here to stay," he says.

The central bank is also likely to find comfort in that households expectations of house price inflation in a year's time are also at 3% and unchanged from the May survey.

Dominick Stephens, chief economist at Westpac, says the survey results were exactly what he was expecting. "The economy's been very weak for a good four-and-a-half years or so now and inflation expectations are still above the middle of the Reserve Bank's inflation band (zero to 3%)," he says.

Still, "the Reserve Bank will be fairly comfortable about keeping the OCR (official cash rate) unchanged for the better part of another year," Stephens says.

Westpac is forecasting the central bank will keep the OCR at its current record low of 2.5% through until July next year.

Jane Turner, an economist at ASB Bank, which is picking the OCR to rise next June, says she expects inflation pressures will eventually pick up over 2013/2014 "as offshore concerns fade and the economic recovery gains momentum - particularly once Canterbury rebuild activity starts to lift."

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