A survey the Reserve Bank (RBNZ) pays close attention to has shown a slight rise in the expected level of inflation in two years time.
The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, will carry weight with the central bank in making its next decision on the Official Cash Rate on Wednesday, August 16. This latest survey result will not change the RBNZ's mind on anything, but it may give it some pause for thought. The RBNZ is widely expected to leave the OCR unchanged.
Economists had expected the inflation expectations to fall and it is to be presumed the RBNZ will have as well. It is likely the survey respondents may have been influenced by the June quarter Consumers Price Index figures, which showed domestic inflation falling only to 6.6% from 6.8% when a rather larger fall was anticipated. The worry is that domestic inflation is going to prove 'sticky'.
At the moment the OCR is at 5.5%. When raising the OCR to that level in May of this year the RBNZ indicated through its forecasts that it would not be raising the OCR any more in the foreseeable future.
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 to 2.83% from 2.79% three months ago.
Westpac senior economist Satish Ranchhod said the latest survey "is a bit of a mixed bag for the RBNZ".
He noted that inflation expectations "remain above the 2% target mid-point even at longer horizons".
"That’s despite the large rise in the OCR over the past two years and sharp fall in headline inflation in the June quarter to 6% (down from 6.7% previously).
"The Survey of Expectations does not play a major role in the RBNZ’s forecasting process. However, it does provide background colour on the economic landscape. And the message in today’s release was similar to that in other recent business surveys: price pressures are easing, but only gradually. That means the RBNZ still has a long road ahead of it to get inflation back to levels consistent with its target.
"We expect that the RBNZ will keep the OCR on hold at next week’s policy meeting. However, with linger strong domestic inflation pressures, we continue to expect another rate hike before the end of this year, most likely in November," Ranchhod said.
The RBNZ seeks to have inflation within 1% to 3%, with an explicitly targeted 2% level. So, what it looks for from this survey is for inflation expectations to be comfortably 'anchored' at around 2%.
Expectations of high inflation are a killer, since these expectations get baked into future pricing and wage intentions. And with annual inflation - measured through the Consumers Price Index at 6.0% as of the June quarter - now having been outside of the RBNZ's 1% to 3% target range for over two years, the RBNZ wants those inflation expectations to wither as soon as possible.
The key point around this particular survey is that regardless of how accurate the forecasts prove to be - and if you look back you'll find they haven't been accurate - what the RBNZ really wants to assess is how confident the 'market' is that it, the central bank, will be able to control inflation in future.
And clearly, if the survey respondents are forecasting inflation in two years' time of over 3.5% - as was the case in this survey at the end of last year, well then there's a lack of confidence out there that the RBNZ has matters at hand.
All of which is a slightly long way around of saying that the RBNZ's efforts are gradually winning over the 'market', but people are still not completely convinced.
Looking further forward the survey shows the expectation in five years' time is that inflation will be on 2.25%. That's down from 2.35% in the last survey.
In terms of 10 years out, the expectation in the latest survey is for a rate of 2.22%, down from 2.28% in the last survey.
The data for the latest RBNZ survey was obtained from 30 business leaders and professional forecasters by the Nielsen group on behalf of RBNZ. Field work for the survey was run between July 20 and July 28, 2023.
Separately, the survey also included the views of respondents on where they see the REINZ House Price Index in one years' time and two years out. Since the last survey three months ago the views have become somewhat more rosy.
For the first time since the survey in the last quarter of 2021 house prices are expected to rise over the next year. The view of prices two years out is now for a slightly bigger rise than was seen in the last survey three months ago.
The RBNZ said the mean estimate for annual house price growth one year ahead rose 431 basis points to +1.42% from the previous quarter’s estimate of -2.89%. The mean two year ahead expected annual house price change was +4.42%, which was 78 basis points higher than last quarter’s mean estimate of +3.64%.
In a separate release the RBNZ said it is reviewing the Survey of Expectations and this will include a new survey provider.
The central bank said that following a competitive procurement process survey of expectations fieldwork will be carried out by Research New Zealand – Rangahau Aotearoa from October 2023. The contract with The Nielsen Company expires in September 2023.
The RBNZ has begun investigations to broaden survey coverage and expand the sample size to increase the statistical quality of results. It will also review the survey methodology and the questions we ask respondents.
It is planned to conduct a public consultation to elicit feedback on the proposed approach to survey enhancements over the coming year.
17 Comments
The problem is, that CPI isn't where we've been treated to real Inflation. Inflation has been conveniently categorised as Capital Gains. So ask any of the experts, in any of the panels, "Where do you see property prices in 2 years time?" and show me any of them that come in with a figure less than up by 5%. Does it matter if a banana has gone up 50 cents if the cost of the home you want to peel it in has gone up $50,000?
Do you measure the cost of a home as the purchase price or the cost of the mortgage repayments? Surely any consumer is going to buy the house with a mortgage so it should be the latter.
Until the recent OCR rises the mortgage repayments have probably gone up fairly close to CPI due to declining interest rates.
Sounds good. But where were mortgage rates 2 years ago? And at some stage, those rates may very well be here again. But the purchase price expended today, is fixed. That's the thing about Debt - the mortgage principal - it's Fixed. And where has all the excess liquidity of the last 15 years gone? Into asset prices and the fabled "Wealth Effect" (there's your translation into CPI, right there) And they have not been measured in the Inflation figures. In effect, we are being told to look in the wrong place.
Correct - every time the RBNZ dropped interest rates they took cash flows from the future and put them into current asset prices (that represent the sum of all future discounted cash rates for that asset).
It is essentially stealing wealth from the future to make people feel richer today - with no consideration for the long term consequences/implications of these decisions.
If the discount rates applied to those assets reverse, then even more cash flows are required in the future to justify current prices - and if those cash flows can't be provided/produced from the producitivy/incomes of our economy, then those asset prices must fall.
You entire reply is the problem we face JimboJones.
Interest rate were dropped for 40 years (early 1980's to 2020) which meant that debt continued to get cheaper, while wages went up with inflation.
Now we face the reverse of that cycle, which might be a complete brain readjustment for a lot of people because it will give very different results to what they have experienced their entire adult lives.
Debt could continue to get more expensive, and at the same time, incomes get chewed up by higher levels of inflation in general consumption items.
It could be a real head wind for asset prices for a long time.
The monetary policy being enacted right now is the consequence of a once in a century event that has caused massive disruption to global economies. But it's being read into by every man and their dog like it's a historic turning point in how economies run.
Maybe it's a black swan event, bringing in a new "cycle". Maybe the system's going to be screwy for 5-10 years until it finds its equilibrium.
Crappy time to make medium term financial decisions either way, but it would seem like once all the dice stop rolling, the same fundamentals we saw for 40 years are still going to be in place, i.e. developed economies are going to target 2% inflation, and they're going to try and do that with monetary policy. It's not like we're going to see a massive reversal of offshoring and the like.
I'd suggest two books if you want to risk check this view (and avoid any confirmation bias from your own life experience - my guess is you are in your 50-60s and have spent your entire adult working life in a falling interest rate environment):
- Changing World Order by Ray Dalio (includes theory around the long debt cycle)
- The 4th turning (which will give background on the demographics at play and how they may impact economies based on previous 80-100 year cycles)
I'm in my early 40s and have tertiary education in the subject matter. I've also read enough "expert tries to predict the future" books to not put large amounts of stock in them. Dalio himself has conceded in recent months his previously bullish views on China have been partially misplaced.
The low interest rates coincide with developed economies that are out of puff. Once the dust settles from covid, it'd seem more likely that'd continue to be the case. I wouldn't wager big stakes on that, and aren't planning my life around it, but I feel many people have been lost in the mania of the last 2-3 years.
Fair enough, my apologies (or is it a compliment?) for assuming you have the online personality of someone 10-20 years older!
The US will continue to export inflaiton to world to avoid defaulting on its national debt and I don't think the world is going to like this very much.
The sweet spot of 0% interest rates post GFC (for asset owners) might be an anomaly that we never see again in our lifetimes. But I could be wrong on this of course.
I probably sound older because the idealism got bashed out of me fairly early on, replaced by stoicism.
Personally I think the easy days of money from real estate appreciation are over. But I also don't think housing will get more affordable without a significant outside influence which will take a long time to realise.
But, at some point the covid era dust will settle, and it could be 2-3 years away, and central banks and governments will revert to cheap credit/debt printing. They'll possibly change the nature of it, so as not to allow for the same sorts of asset appreciation we've seen
Agree bw.
Does it matter if a banana has gone up 50 cents if the cost of the home you want to peel it in has gone up $50,000?
Not really, unless you let the media do your thinking for you, in which case those banana prices are the only cost of living crisis worth talking about.
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