Expectations survey should cheer RBNZ before OCR review

Economists expect the latest RBNZ’s latest Survey of Expectations to help quell the central bank’s concerns about the longer-term inflation outlook.

The just-released survey results come before next week’s OCR review.

Expectations for inflation one year ahead have fallen sharply for a second quarter, dropping to 2.7%, down from 3.2% in the previous survey.

That follows the fall in actual inflation in recent months.

Similarly, the closely-watched two years ahead measure dropped to 2.33%, down from 2.50% last quarter. This measure is now back around the average seen since 2002, when the RBNZ shifted to a 1-3% target range for inflation.

Expectations for inflation five and 10 years ahead held broadly steady a little above 2%.

Westpac senior economist Satish Ranchhod says the importance of the survey in the RBNZ’s policy deliberations has fallen over time, with the central bank instead preferring to look at a range of different measures of inflation pressures.

“Even so, the result will be welcome news for the RBNZ, and will help to reinforce expectations that inflation will continue to drop back over the course of this year.”

Ranchhod says the big question now is how fast will inflation decline?

The annual inflation rate fell to 4% per cent in the March quarter from a peak of 7.3 % in the June 2022 quarter. However, domestic inflation is not falling as fast as imported inflation and was sitting at a worrying 5.8% in the March quarter, holding up any decisions by the RBNZ to cut the OCR. 

The survey respondents are concerned that keeping the OCR at 5.5% will mean the economy grows at a sluggish rate of 0.98% a year over the next year, before slowly moving up the next year to 2.01%.

Ranchhod says over the past year, domestic inflation pressures have proven to be ‘sticky’ – lingering at higher levels than the RBNZ and other forecasters have expected.

He says Westpac’s economists still think inflation will fall more gradually then the RBNZ has assumed and are not forecasting OCR rate cuts until early next year.

On average, survey respondents expect the OCR to be 5.46% by the end of the June quarter this year and to decline to 4.79% by the end of the March quarter next year.

They also expect the unemployment rate to rise to 4.90% in one year and drop to 4.79% in two years' time. Alongside this, annual wage inflation is expected to drop 18 basis points from 3.73% to 3.55%. Two-year-ahead wage inflation expectations have risen from 2.99% to 3.23%.

House inflation expectations for one-year-ahead annual house prices have dropped 1.39 percentage points from 4.82% to 3.43%. Two-year-ahead house price inflation expectations declined from 5.78% to 4.74%.

The RBNZ’s OCR review and release of a Monetary Policy Statement on 22 May will come a week before the Government announces the Budget.

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