MENU

New Zealand Dollar's Outlook Underpinned by Robust Inflation Expectations Survey

- Rising inflation expectations +ve for NZD outlook
- Businesses expect slightly weaker NZD
- Coronavirus could dominate RBNZ thinking at Feb. meeting

Auckland view

Image © Adobe Stock

- Pound-to-New Zealand Dollar spot rate: 2.0094 +0.40%
- Bank rate for transfers (indicative): 1.9380-1.9525
- Brokerage rate for transfers (indicative): 1.9906 >> More details

There has been a notable increase in inflation expectations in New Zealand in early 2020, a supportive development for the New Zealand Dollar as it could mean the Reserve Bank of New Zealand (RBNZ) resists cutting interest rates any further.

The RBNZ's Survey of Expectations showed expectations for inflation picked up in early 2020. Inflation expectations for one year ahead have increased since last quarter’s survey from a mean of 1.66% to 1.88%. Expectations for two years ahead increased from 1.80% to 1.93%.

The Reserve Bank of New Zealand Survey of Expectations is a survey of business managers and professionals conducted on behalf of the central bank by Nielsen.

NZD inflation expectations

The increases in inflation expectations come in the wake of stronger-than-expected CPI inflation result for the December quarter, which rose to 1.9% which is just shy of the RBNZ's target of 2.0%.

"Inflation expectations are a key input to the RBNZ’s policy deliberations ahead of next week’s OCR decision. The RBNZ does pay close attention to this survey. They also focus on measures of inflation expectations derived from inflation index bonds, which have been broadly steady since the last policy statement," says Satish Ranchhod at Westpac.

With inflation turning higher the potential for another interest rate cut at the RBNZ diminishes, at least from a domestic perspective. The rule of thumb in foreign exchange is that when a central bank cuts interest rates the currency it issues falls in value.

The RBNZ cut interest rates in New Zealand twice in 2019, from 1.75% to 1.0%, a decision that analysts have said contributed to the currency's soft tone throughout the year.

If inflation starts to rise, the need for further cuts diminishes and the prospect of a rate cut could even increase, which is on paper supportive of the New Zealand Dollar.

"Overall, the inflation environment is currently looking a little firmer than the RBNZ had expected at the time of the last policy statement in November, with a pick-up in inflation, inflation expectations, wage growth and house prices," says Ranchhod.

 

Expectations for the NZ Dollar

The Survey also asks business managers and professionals their view on the outlook for the New Zealand Dollar and early 2020 sees expectations for a slightly softer currency.

The NZD/AUD exchange rate is expected to be 0.96 at the end of June 2020, and 0.95 at the end of December 2020. It was at 0.967 when the survey was conducted (24 January 2020).

The NZD/USD exchange rate is expected to be 0.65 at the end of June 2020 and at the end of December 2020. It was at 0.662 when the survey was conducted (24 January 2020).

NZD expectations

Looking at other key expectations, according to respondents house prices are expected to grow at 5.65% in one year’s time. This is an increase from 4.51% reported in the previous quarter’s survey.

Compared with last quarter, expectations for annual real GDP growth increased slightly from 2.14% to 2.18% for one year ahead. The September quarter rolling-annual GDP growth reported by Stats NZ was 2.7%.

The unemployment rate in one year is expected to be 4.26% and 4.36% in two years’ time. Stats NZ reported a decrease of the seasonally adjusted
unemployment rate from 4.1% to 4.0% for the December 2019 quarter (this was released after the survey was completed).

Expectations for annual growth in wages increased from 2.76% to 3.06% for one year ahead and 3.03% for two years ahead.

Stats NZ reported an increase in the private sector average (ordinary time) hourly earnings of 3.0% for the December 2019 quarter (this was released after the survey was completed).

 

Coronavirus Looms Large Over RBNZ

As mentioned above, the inflation expectations survey forms part of a domestic discussion on RBNZ policy and its potential impact on the NZD. The other key consideration is of course external, with the issue of the coronavirus outbreak in China likely to form a central consideration for the RBNZ.

The coronavirus outbreak has seen 31485 people infected with the virus, resulting in 638 deaths. China has imposed strict rules on travel and the virus is widely expected to impact on Chinese economic growth.

China is New Zealand's primary trading partner and the coronavirus could therefore have implications for New Zealand's economy in the first half of 2020.

Westpac think the RBNZ will be conscious of the impact of the coronavirus when they meet for their February policy meeting. "We’ll be watching to see how the RBNZ balances concerns around the disruptions to near-term activity from the virus with the signs of firming in New Zealand economy," says Ranchhod.

BannerTime to move your money? The Global Reach Best Exchange Rate Guarantee offers you competitive exchange rates and maximises your currency purchasing power. Combine great rates, professional guidance and market insights to help you make your money go further. Find out more here.

* Advertisement

BannerExpat pension changes: How Brexit will impact your UK pension if you are living in the EU. Capital Rock Wealth have developed a comprehensive guide to help you navigate the uncertainty ahead. Find out more here.

* Advertisement

GBP/NZD download banner

Sirelo banner