A closely watched inflation indicator has fallen into the Reserve Bank’s target range for the first time since 2021, suggesting confidence that inflation will be brought under control.
The Reserve Bank’s quarterly Survey of Expectations showed businesses expected inflation in two years’ time to be 2.8%, down from 3.3% in the previous survey.
This falls within the central bank’s inflation target range of between 1% and 3% and demonstrates that influential groups believe the Reserve Bank (RBNZ) will win its war on inflation.
Every three months, Nielsen surveys 32 business leaders and professional forecasters on behalf of the RBNZ. It acts as a temperature check on what decision-makers are anticipating to happen in the economy, and is a factor in monetary policy decisions.
It will be one of a range of data points the RBNZ's Monetary Policy Committee considers when it meets later this month to set interest rates and review its policy settings.
Kelly Eckhold, chief economist at Westpac NZ, said the results were encouraging but the central bank had been paying less attention to this measure in recent years.
Westpac’s dealing room had been interested, however, and both the NZ dollar and the two year swap rate declined after the data release. The currency was trading at 66.62 US cents down about 0.3%.
“It’s often an indicator that doesn’t get a market reaction, but we have been getting a lot of questions from market participants in the past few days, so there is a sense that people care,” Eckhold said.
In the survey, respondents’ expectations for one-year-ahead inflation fell from 5.1% to 4.8% in the largest drop recorded since 2020. Five and 10 year expectations never left the target range and were both at 2.3%.
The vast majority of those surveyed expected the Official Cash Rate to rise to 5.5% by the end of June, but some saw a chance of it being lower.
By the end of March 2024, views differed widely with rates between 3.5% and 5.5% on the table, but consensus was around 4.8% down from 5% in the previous survey.
Wage pressure
Also showing promise for the Reserve Bank was the first drop in wage growth expectation since June 2020. The means the one-year-ahead response for wage inflation was 4.8%, down from the 5.5% recorded in the last quarter.
Unemployment rate expectations also rose to 4.3% in the year ahead, and 4.8% in two years' time, as respondents predicted a short recession.
Gross domestic product was expected to fall half a percent in the coming year, before bouncing back to 1.7% growth two years ahead.
The RBNZ said this was the first time since June 2021 that survey respondents expected an increase in two-year-ahead GDP growth.
Westpac’s Eckhold said the survey results would be comforting but there would be a wider set of factors the Reserve Bank was thinking about.
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