Survey shows inflation expectations falling – good news for RBNZ

Inflation expectations falling back across the board will be welcome news for the Reserve Bank.

Wednesday, February 14th 2024, 11:00AM

The RBNZ’s January quarter Expectations Survey shows business leaders’ and professional forecasters’ inflation expectations are continuing to drop and move closer to the RBNZ 2% target.

On average, the 38 people surveyed see the annual inflation rate falling to 3.22% from 4.7% by this time next year and 2.5% by early 2026.

Westpac senior economist Satish Ranchhod says it should reinforce the case for an ‘on-hold’ decision at the RBNZ’s policy meeting this month.

A closer look at the survey shows expectations for inflation two years ahead dropped by 2.5%, down from 2.76% last quarter. These are the lowest readings since 2021 and follow the decrease in actual inflation over the past few months.

Expectations for inflation at longer horizons are dropping back, and while they remain above 2%, they’re moving in the direction the RBNZ wants, Ranchhod says.

“Reinforcing the picture of easing inflation pressures, expectations for wage growth over the coming years have also dropped back sharply.”

The RBNZ has been concerned domestic inflation pressures remain “sticky” and expectations are a key part of that story. “If businesses expect inflation to remain high, they are more likely to try and push through larger increases in prices. That will also affect wage setting, he says.”

There is still a lot of water to go under the bridge – headline inflation remains elevated at 4.7% in the year to December and domestic inflation is running hot.

Also, expectations are still higher than the RBNZ would like them to be, Ranchhod says.

However, conditions are moving in the right direction. Inflation and inflation expectations are dropping back, and both economic activity and the labour market are cooling.

“Those conditions mean that, while the RBNZ won’t be easing their foot off the brake just yet, they are likely to feel comfortable that policy settings are tight enough to get inflation back to target.”

Westpac continues to expect that the RBNZ will leave the OCR on hold this year, and is not forecasting cuts until early 2025.

In other expectations, survey respondents see the unemployment rate rising to 4.64% in a year’s time and 4.69% in two years’ time.

And respondents see house prices rising by an average of 4.82% this year, before picking up to 5.78% next year.

Tags: RBNZ