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

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 now 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.  

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30 Comments

Interesting times, pick a number. 1%OCR december 2021

No way - you won't see any rate rises this year. Maybe 1% by December 2022 is a bit more feasible.

Because you now have three tools in play (OCR, FLP, LSAP) it probably makes more sense to talk about tightening or loosening conditions rather than the OCR itself.

Ha. 2%
Try 5% by end of year

IMO there is about a 10% - 15% chance of a 5%+ OCR by end of 2022. If the OCR gets to 5% any time this decade there will be total carnage.

Sure lets spray numbers here there and everywhere woohoo

mk29,

I think you should change the pills you take. You are now predicting both an almighty crash by Oct. AND a 5% OCR by the yearend.

Can you spot the contradiction?

What do you think inflation does to stock market indices?
Inflation has been falling or flat in Western world since about 1987
Bond market is hugely bigger than stock market in capitalisation.
Bond market bubble started about 1982.
It ends when rates hit rock bottom and inflation rises, making yields v negative for investors holding bonds.
USA bond market has $13t due to be revolved in 2021.
What do you think inflation of 5% does to economy when wages rise at 3%? Yes, people get worse off.

With the level of debt households and government now have in New Zealand? CPI would crash.

2%. hah.
Not out in the real world where we live in houses

Yeah, well, that's CPI. New Zealand doesn't even publish CPIH or RPI (both measure that include property prices) any more so we don't have a comprehensive view what the overall inflation rate is: https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

It won’t take much of a new shock to knock inflation down again, & add more QE.
Pestilence 2020/2021, GFC 2008, ... future China or Iran or ?? Warfare, Sharemarket crash, climate events, etc. unlikely that old-world inflation will get carried away.

Inflation was always going to happen and in my view will get worse as a result of the Pandemic.

We have kept the same demand (and/or increased in many cases) yet have had supply chains completely disrupted. Hence price goes up!
Profits for a lot of large corps have dropped. So they can the sales. Prices go up!

We can change the interest rates all we want. That only really impacts housing.

What we will need to watch is not so much inflation. But the complete inability to buy/source certain products. Lifestyles will change whether people want them to or not.

Govts and RBs will never allow another 1929 Depression event.
So tightening is unlikely.

Next shock will only take inflation higher

I always do my grocery shop online and have a favourites list that I select from. This makes price changes very easy to notice. 80% of my regular items have gone up in price over the last 12 months.

But by how much?

Inflation is coming. Stupid housing speculation retirement lifestyler at all costs bubble is a big driver. Interest rates is also a big driver, let's face it $1m in the banks is now worthless after tax. And the last three govt have fiddled while NZ burns.

Tried building a house lately...expensive. Guess what, tradies want to own a house too. My sushi local is up 20% after holidays. Food, and anything touched by a human hand is going to go bananas.

I'm personally calling stagflation - businesses will automate and change operations to avoid inflated wage costs, or spread same cost over less people.

All to protect the banking masters debt ponzi.

Yup - that seems to be the future now finally emerging from the fog as the end-game approaches.
And I can see govts redoubling their efforts to chase money around the world to try and prop up their tax takes, as deficits get harder to fund, and more of us become a drain on them.
People, capital and tech will be sloshing everywhere looking for dry land as fiat purchasing power evaporates.
Read a string of comments yesterday from the U.S. about people with money abandoning high tax places like California and pricing (and driving) locals out of places like Texas. Same thing happened in Silicon Valley when it took off decades ago - IT workers in, local scumbags out.

Yup - Economic exhaustion from misallocation of resources caused by central back manipulation.

Don't miss the Keiser report. Max is the man.

Central Banks everywhere have shown their dovish credentials enough times. There will always be some bogeyman to point at. The US fed is too scared to even talk about anything positive, for fear the equity markets might get spooked by the slightest hint of withdrawal of support.

Orr won't touch interest rates until we're north of 3%.

Agree but North of 3% might be far closer than we imagine.

The OZ bank club, gossiping the market with this inflationary mirage figure, in the hope to turn RBNZ away from negative OCR, so let's see if RBNZ can be herded by them, so far they can with the LVR, but can they do the same with OCR? DTI? Bank's CAR? TD guarantee? - From history of illicit drug baron, they can even dictate to highest level of governance - remain to be seen how invisible the cartel lever in NZ of controlling RBNZ & govt.

How can so many people see the outgoing tide from indefinite QE and mmt based on doing the same thing and expecting a different result. But not see the incoming tsunami of sound monetary policy, hard baked into code, that is immutable, and in a binary fashion succeeds or fails based on the merits of those same coded rules in blockchain. Isn't it obvious which system is the rat, and which is the rat poison? Surely Bitcoin will be to the USD, what the USD was to the ZWD in the very near future.

(I know I keep banging on about crypto like a zealot, but if I'm right it's a pretty huge deal and deserves this amount of attention)

I find your posts informative, as a fellow (albeit less informed) CryptoGuy. Cheers.

Thanks CrispyKahawai. Hopefully if there's enough educated Kiwis on crypto we can get ahead of the curve to the benefit of the country and all of us. That'd be something great.

Inflation up, means interest rates down. Unless I've missed something.

Possibly what you have missed is that, although, rising inflation would normally drive rates down because the economy slows, things these days are back to front with a different starting point:
Govt panics about low growth and inflation and artificially drives rates down to try to stimulate growth and meet all-weather inflation range policy objectives.