Business leaders expect quicker inflation drop

In its latest Survey of Expectations, the closely watched measure of expected inflation in two-years’ time has dropped to 2%, down from 2.3% in the last quarter.

This figure is significant as annual inflation has been outside the RBNZ’s target band of 1-3% since June 2021.

Expectations for inflation two-years ahead are now below the average seen since 2002, when the bank shifted to a 1 to 3% target range for inflation.

Notably, says Westpac senior economist Satish Ranchhod, this measure has not typically fallen to these sorts of lows except at times when actual inflation has fallen below 2%.

Across all the time frames surveyed from one year to 10 years, the expectations of future inflation have dropped and are now touching on the RBNZ's explicitly targeted 2% level.

The one year figure is  2.40%, down 33 points from the previous quarter’s 2.73%, the five year figure is 2.07%, down 18 points from 2.25% and the 10 year figure is 2.03%, down 16 points from 2.19%.

Although an important survey in the RBNZ’s policy deliberations and the last piece of noteworthy information before its OCR review on Wednesday, Ranchhod says its significance has fallen over time, with the bank preferring to look at a range of different measures of inflation pressures.

“Even so, the result will still be welcome news for the RBNZ, reinforcing other indications that inflation is set to drop back within the RBNZ’s target band soon. We’re picking inflation to fall to 2.6% in the September quarter.”

He says the survey reinforces Westpac’s expectation the RBNZ will signal earlier rate cuts than previously assumed at its policy meeting next week. Westpac is forecasting OCR cuts to begin in October.

Data for the survey was obtained from 33 business leaders and professional forecasters by Research New Zealand on behalf of the RBNZ.