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Low inflation, high unemployment expected

Wednesday 27 Feb 2013 6:24 a.m.

New Zealand inflation is expected to remain subdued over the coming two years while unemployment stays relatively high, according to the latest central bank survey.

Respondents to the Reserve Bank's March survey of expectations don't see any sign of rising interest rates, with consumer price inflation seen at 1.67 percent for the year ahead and 2.17 percent in two years' time. That's down from 1.77 percent and 2.27 percent respectively from the January survey.

"Monetary conditions are currently perceived as being easy, and are expected to remain easy over the forecast horizon," the Reserve Bank said in its commentary.

Governor Graeme Wheeler has found himself stuck between a booming property market in Auckland and $30 billion rebuild in Christchurch gathering momentum, and a tepid economic recovery and subdued inflation with the strong kiwi dollar taking the sting out of imports.

ASB economist Jane Turner said the decline in medium-term inflation expectations is in line with the moderation in various measures and underpin the downbeat environment.

"Due to the subdued near-term inflation outlook, we expect the RBNZ will leave the OCR (official cash rate) on hold at 2.5 percent until March 2014," she said.

The 74 respondents were still pessimistic about the labour market, with one-year ahead expectations for the unemployment rate down 0.1 of a percentage point to 6.7 percent, while two-year ahead picks were unchanged at 6.3 percent.

Earnings growth expectations fell, with year-ahead wage increases expected to be 2.3 percent, from 2.5 percent in the January survey, and the two-year ahead outlook falling 0.2 of a percentage point to 2.7 percent.

Still, they're slightly more upbeat about the economy, with real gross domestic product growth of 2.3 percent expected for the one-year horizon, and 2.6 percent for the two-year. That's up from 2.1 percent and 2.3 percent, respectively in the previous survey.

NZN

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