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.
31 Comments
Expectations feed into how businesses set prices and workers negotiate wages. So, lower inflation expectations can be a self-fulfilling prophecy. You are right, it doesn't account for supply shocks or dramatic changes in circumstances.
Its an expectation, rather than a forecast. It doesn't predict the future, it shows what people are factoring into their decision-making today.
RBNZ will be making decisions based upon this (and other) data.
So when you realise they are making decisions based upon data that is likely wrong you realise they are continuously flying by the seat of their pants.
The risk of making an error is therefore very high - even though they try to continuously create the illusion of having everything under control.
"In the survey, respondents’ expectations for one-year-ahead inflation fell from 5.1% to 4.8%"
Obviously this is overall good news (falling inflation expectations). But that the consensus is that inflation will still be running at nearly 5% this time next year is still very bad!
Not sure if this will change the RBNZ's stance much until the one year expectation is back within the target band.
If the real time/actual measured CPI is still at the expected rate (4.8%) then where do we think the CPI and mortgage rates will be this time next year?
And if we keep mortgage rates where they are for another year, the damage will be done to the housing market. And then why would you buy if you knew houses will be cheaper this time next year than they are now if the only saving grace is lower mortgage rates - which will come down if you wait anyway as the recession hits?
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.
So... who are these 'influential groups'? Perhaps they are trying to influence the RBNZ right now, via their responses, by telling it what they think it wants to hear?
The RBNZ will win its war on inflation regardless, it's just a matter of time. But some 'influential groups' may no longer be around to see it...
Mr Orr has no way to control the price of fresh food unless he can make the sun shine. Recent food inflation has nothing to do with economic strength of weakness and everything to do with a lot of rain. House prices are falling, fertiliser prices are falling and the general trend for inflation is downward.
Food is an essential. You can't control the cost of it with interest rate rises when we've had so many weather events.
You can influence the price by increasing competition. The government declined to do this. Our rich list stats are stuffed with supermarket oowners. They can pay for lobbyists.
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