New RBNZ survey can’t be music to its ears

Businesses across the country expecting to thrive in 2025 are still in a big hole, down in the dumps and it is showing in a big new survey by the RBNZ.

The expect inflation to still be rising in 10 years and this will not be music to the RBNZ’s monetary policy committee.

It is expected to drop the OCR to 3.25% next week but any further cuts may be influenced by the survey of 636 businesses showing they are expecting inflation to rise across one, two, five and 10 years.

In the first quarterly release of Tara-a-Umanga Business Expectations Survey, the RBNZ says it is specifically designed to synchronise with Monetary Policy Committee (MPC) meeting cycles, so the committee has near real-time expectations data.

Estimates of inflation and other macroeconomic expectations are used as a key information source by the MPC to set monetary policy.
Business expectations for mean one-year-ahead inflation increased from 2.25% to 2.44%; two-year-ahead rose from 2.47% to 2.54%; five-year ahead lifted to 3.06%; and 10-year ahead to 3.94%.  

Although every time horizon showed an increase in businesses believing inflation will lift, their expectations are still within the RBNZ’s 1-3% inflation target.

While the RBNZ already runs an existing Survey of Expectations alongside its Household Survey of Expectations, which focuses on the views of experts, such as professional forecasters, economists, and, currently, industry leaders, the new survey, piloted in September last year and March, is broader covering views across the economy from small and medium-size businesses.

“Small and medium size businesses may have less incentives to pay attention to macroeconomic news so their inflation expectations may be more influenced by their own experiences,” the RBNZ says.

Inflation expectations are important "because households and businesses reflect their expectations in their price- and wage-setting decisions".

The central bank says improving the quality of its expectation surveys is part of the wider response to its 2022 review of how it formulates and implements its monetary policy.

“In this review, we identified several areas where better data could support high quality monetary policy decision-making."

The results

In the two-year ahead inflation horizon, of which the RBNZ takes the most notice, expectations increased overall but varied by industry and business size.

The weighted mean two-year-ahead annual inflation expectation increased seven basis points from 2.47% last quarter to 2.54% this quarter. This increase was driven by manufacturing and other industries across large and small-sized businesses.

Businesses in manufacturing and other industries expect inflation increases to 2.49% and 2.62%, respectively. In contrast, businesses in primary and retail industries expect a drop to 1.82% and 2.19%, respectively.

Construction businesses expect relatively flat two-year-ahead inflation expectations, at 2.71% this quarter.

Large and small-sized businesses expect inflation to be 2.46% and 2.90% this quarter, up from 2.26% and 2.73% last quarter, respectively. Medium-sized businesses reported a decline from 2.72% to 2.44%.

Even in 10 years, businesses are predicting inflation will be rising.

The weighted mean increased by 24 basis points from 3.70% to 3.94%, driven by retail, manufacturing, and other industries and large and small-sized businesses.

Retail businesses expect an increase of 1.04 percentage points from 3.37% to 4.41%, while manufacturing and other industries businesses predict increases, to 3.81% and 3.98%, respectively.

In contrast, expectations from the primary and construction industries dropped, to 2.47% and 4.09%, respectively.