A survey the Reserve Bank pays close attention to has shown another sharp rise in the expected levels of future expectation in an indication that the central bank is not yet seen as getting inflation under control.
The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, are likely to carry a lot of weight with the central bank in making its next decision on the Official Cash Rate on November 23. At the moment the OCR is at 3.5%.
The key result in the survey is that the expectation for inflation in two years' time - the most watched measure in the survey - has risen very sharply to 3.62% from 3.07% three months ago. If this expectation came to pass it would mean inflation would still be outside of the RBNZ's targeted 1% to 3% range by the end of 2024.
And of course it would be well above the RBNZ's explicit 2% target.
But even looking further forward, there's not much encouragement for the central bank.
According to the latest survey the expectation in five years' time is that inflation will be on 2.44%, up from 2.33% in the survey three months ago.
As for the story looking 10 years out, well the latest survey has an expectation of inflation at 2.18%, up from the previous survey figure of 2.13% and of course again above the explicitly targeted 2% figure. In 10 years time.
Westpac senior economist Satish Ranchhod said the strong increases in the survey "will no doubt be a worrying sign for the central bank".
"Interest rates have been on the rise for over a year now. However, underlying inflation is not showing signs of easing. And now, with inflation expectations pushing higher, there’s a risk that the inflation cycle could be even more protracted. That’s because expectations are a key input into how businesses adjust wages and prices, and their creep higher signals ongoing price pressures over the year ahead.
"We’re forecasting a jumbo-sized 75bp [basis-point] rise at the RBNZ’s next policy meeting on 23 November. Today’s strong result means that sort of extraordinary rate rise is even more likely," Ranchhod said.
The data for this survey was obtained from 33 business leaders and professional forecasters by the Nielsen group on behalf of RBNZ. Field work for the survey was run between the October 19 and 25, 2022.
As stated above, the key survey statistic is what the surveyed experts view inflation will be in two years' time. The RBNZ is always looking for expectations to be 'anchored' around 2%. Recently as actual inflation has taken off these expectations have become seriously unmoored and have risen rapidly.
Since the last survey results came out in early August there's been release of GDP figures in September, inflation figures in October and labour market (unemployment and wages) figures just last week. The last of those three data releases was not released before this survey was actually conducted, but the inflation figures most certainly were.
All of that data was 'hot', mostly surpassing expectations of economists with the sheer strength of the figures. For its part the RBNZ got very close to picking the GDP number, missed by a long way on inflation and had unemployment figure right and was closer than anyone on wage rises - but still came in slightly too low with its private sector hourly earnings increase figure that other economists had tended to look at with raised eyebrows because it was so much higher than other people's picks.
But of course in all this data it's the unpleasant inflation surprise that's truly the biggie - and has led to the kind of result we've seen in this latest survey.
In many respects this survey series can increasingly be viewed as a measure of the RBNZ's credibility in achieving its inflation target.
What the current results are telling you is there's doubt out there that the RBNZ is on track to rein in the inflation beast. Confidence has been knocked. That's a bad thing because if people don't believe that the RBNZ can tame inflation then we will see future price setting behaviour incorporating ongoing expected levels of high inflation. And this can be self-fulfilling.
It's another complication in already complicated scenario for the RBNZ as it decides what to do in its November 23 Official Cash Rate review. And of course yet another complication is the fact this is the last OCR review for 2022 and the next one's not for three months - on February 22, 2023.
Most economists are juggling between picks of either a 50 basis point rise for the OCR or a 75 point rise. Personally, I think these survey results - which will have a big influence on the RBNZ - make at least a 75-point rise a slam dunk. I do still think there's some chance we will see a 100-pointer.
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