Influential RBNZ survey shows inflation is now expected to be approaching 2% in two years' time, while negative interest rates are now no longer anticipated

A quarterly survey the Reserve  Bank pays close attention to with regard to its monetary policy settings is showing markedly higher expectations of the future levels of inflation.

Additionally, respondents to the survey are no longer expecting that the RBNZ will take official interest rates negative - while in the last survey, released in November, they did expect negative rates.

The results will likely fuel further market speculation as to whether the RBNZ may actually be forced to start raising interest rates next year, which would be contrary to all expectations as recently as towards the end of last year. 

Economists are quickly turning their thoughts from minus rates to when rates may go up again.

The RBNZ Survey of Expectations is a New Zealand-wide quarterly survey of business managers and professionals. Respondents for this survey include a mixture of professional forecasters, economists and industry leaders operating in New Zealand. Nielsen conducts the survey on behalf of the Reserve Bank. Respondents are asked for their expectations of future outcomes of a range of key macroeconomic data. 

This survey is conducted in February, May, August and November.

The survey carries a lot of sway with the RBNZ. In the past the central bank has been known to move the Official Cash Rate in response to sudden movements in inflation expectations. For example a completely unexpected cut to the OCR that the RBNZ did in March 2016, followed on very closely from a 26-basis-point fall in two-year-ahead expected inflation in this same survey series, released shortly before the OCR decision was made.

So, the latest survey results, coming ahead of the RBNZ next Monetary Policy Review on February 24 are significant. The RBNZ has been extremely 'dovish' in its communications in the past year as the country grapples with the Covid crisis. But the sharp rise in inflation expectations will be sure to give the central bank pause for thought.

The most watched statistic in these surveys is the expectation for inflation in two years' time. And while the result in the latest survey is not one that should terrify anybody, it nevertheless represents a sharp climb in inflation expectations in a short space of time.

The two-year expected inflation rate in the latest survey is 1.89%, and that's up from just 1.59% as of three months ago, while as recently as June last year the expectation was just 1.24%. On the face of it those moves don't sound much, but the reality is the expectation figures generally don't fluctuate much from survey to survey, so to see inflation expectations move up by as much as 30 basis points in just one survey is significant.

Additionally, the shorter term inflation expectations (a year out) have moved up even more sharply to 1.73% from 1.23% at the end of last year.

Not surprisingly then, respondents to the survey now no longer see the RBNZ moving the OCR into minus territory.

At the moment the OCR is on 0.25%, which is where it has been since March 2020. 

Respondents to the survey have come up with an average expectation a year out of an OCR of 0.28% - which suggests some participants actually expect rates may go up in the next year, while most believe they will stay the same.

Expectations of house price inflation are up too, but perhaps surprisingly are lagging the real thing.

The respondents to the survey see house price inflation in a year's time of 8.02%, up from 5.47% in the last survey. The real rate of house price inflation for 2020 of course was 17%.

However, the survey respondents do believe that house price inflation will settle back next year and they are picking a 4.71% rate in 2022, which is actually slightly lower than that expected at the end of last year.

Expectations for unemployment softened over the course of the last quarter. One year ahead unemployment was expected to increase to 5.7% which is down from last quarter’s estimate of 6.9%, but is still higher than the hugely surprising latest Stats NZ unemployment statistic of 4.9%. Two year ahead employment projections were more optimistic with a mean of 5.0%, only a small increase from the current official figure. The RBNZ noted that the survey fieldwork was conducted before the release of the latest unemployment rate publication.