Inflation expectations drop in key RBNZ survey

Bonds / analysis

Influential RBNZ survey shows a small but significant drop in the expected level of inflation in two years time, and a sharp drop in expectations of one-year-out inflation; house prices expected to rise

8th Nov 23, 3:51pm by David Hargreaves

Source: 123rf.com

A survey the Reserve Bank (RBNZ) pays close attention to has shown a drop in the expected level of inflation. It also shows a rise in expected house prices.

According to the key survey results, the expectation for inflation in two years' time (the most watched finding) has dropped to 2.76% in the latest quarter, down from 2.83% in the previous quarter.

The one-year-out result is a sharp drop, to 3.6% from 4.17%.

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, November 29.

Following on from the actual fall in the annual rate of inflation as of the September quarter to 5.6% from 6.0% and the rise in the unemployment level also at the September quarter to 3.9% from 3.6%, it all means there's now no chance at all the RBNZ will move the Official Cash Rate, currently on 5.5% at the next review.

The RBNZ said the the data for this quarter was obtained from 37 business leaders and professional forecasters by Research New Zealand – Rangahau Aotearoa on behalf of RBNZ. Field work for the survey was run between the 18th and 26th October 2023.

Survey of expectations fieldwork was carried out for the first time by Research New Zealand – Rangahau Aotearoa. The new research provider was selected through a competitive procurement process, as the contract with the previous provider the NielsonIQ expired in September 2023. No changes to the survey questionnaire nor panel of respondents have been made at this stage.

The RBNZ's detailed explanation of the latest results shows expectations of inflation further in the future have actually risen a little.

The expectation for five years' time has gone up to 2.43% from 2.25%, while the 10-year expectation has risen to 2.28% from 2.22%. This won't unduly perturb the RBNZ since both those results are still 'anchored' somewhere towards the middle of the central bank's targeted 1% to 3% inflation range.

However, those results do suggest there's a growing feeling that inflation may 'stick' at higher levels in the future than we've seen in the recent past.

The survey also asks for respondent's views on where they see the REINZ House Price Index in one years' time and in two years' time.

As actual house prices have languished recently, then so have views on future prices - but they are now perking up noticeably.

Survey respondents expect the HPI to be up 4.84% in a year, compared with an expectation of just a 1.42% rise in the last quarter.

And in two years the expectation is for a 6.22% rise, up from a previous expectation of 4.42%.

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. 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.

The latest results will give the RBNZ a fair degree of satisfaction that matters are moving in the right direction.

When announcing the change of research provider for the survey last quarter, the RBNZ said it had 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.

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31 Comments

by Piggy | 8th Nov 23, 7:34pm 1699425271

I didn’t get past the headline but that is brilliant.

by riffraff | 8th Nov 23, 10:31pm 1699435895

*tumbleweeds*

by ryanjames | 9th Nov 23, 12:08am 1699441711

Good news doesn't play so well around here.

by longjohndrop | 8th Nov 23, 11:23pm 1699438994

LMF

lower much faster

by GetFeeling | 9th Nov 23, 8:24am 1699471455

We'll know for sure after Christmas.

Good to see TV news last night picking up on the fact that businesses are breaking. What they haven't yet picked up on is that a certain sector of our society are doing just ticketty-boo and are the source of our inflationary pressures.

by Tallmantim | 9th Nov 23, 2:11am 1699449081

These inflation figures and CPI figures are complete BS.

what matters to us normal people is what is my actual cost of living.

And I can tell you in the second half of this year they are still sky rocketing.

Wheelie Bin Renewal. Up 11%. (Down from last years 16% increase)

Council Rates Up 9%

Insurances Up 25% (mainly house insurance)

Petrol. Up 22%

Internet Up 30% (although I switched provider which means I’m now only paying 16% more)

Cellphones bill. Up 18%

Food bill. Up around 10%

This is all just in the second half of this year!

my wages have increased just 5% this year, though with loss of government tops up I’ve actually probably got less cash in the hand.

in short all these government stats are just hiding what’s really going on out there.

by Chaosinflesh | 9th Nov 23, 7:13am 1699467239

These aren't real data, just a select group of people's guesses.

Take the house price inflation, for example: 6% over the next 2 years.

It's all wishful thinking, but that doesn't make it wrong - though could be a good metric for RBNZ to supplement it's OCR decisions with (oh, except house prices aren't in the control variable). If people are expecting significant inflation in house prices, that should be a clear sign interest rates are still too low.

by longjohndrop | 9th Nov 23, 7:28am 1699468129

How about we fix the underlying house price pressures instead of artificially pushing prices down and punishing everyone who uses debt.

by Pa1nter | 9th Nov 23, 7:32am 1699468320

You'd need a systematic redress of new dwelling generation, which is a very hard thing when most of the public want to attribute everything to a very narrow range of influences.

by Chaosinflesh | 9th Nov 23, 7:55am 1699469758

You mean the ready access to cheap debt for a greedy subset of the population? Pretty sure the cure is related to the ill.

Over-leveraged debt junkies who splurged during a time of artificially reduced debt costs have only themselves to blame.

Sadly, some FHBs got caught in that trap too - but it's always someone else's fault, right - not their own inability to plan for future adverse contingencies?

by longjohndrop | 9th Nov 23, 8:18am 1699471122

You can continue to make ongoing personal attacks against entire subsets of our population for taking out a mortgage. But don’t get mad when I direct the energy back to all the DGMs like yourself who cheered this on for the last 2 years

But the matter of the fact is, no matter what you say - Lower Much Faster.

by Chaosinflesh | 9th Nov 23, 8:45am 1699472707

Lower much faster may mean unemployment and even more mortgage stress.

The fact of the matter is, only the over-leveraged need worry about either equity reduction or interest rate increases.

'Personal attack against a group of people' - is a new one to me.

Funny how wanting better housing outcomes for all people living in NZ makes me a DGM, though.

by Pa1nter | 9th Nov 23, 9:19am 1699474789

Except all you're doing is ranting about the greedy and over leveraged. Which is related to housing affordability, but not actually addressing it.

Most people want everyone around them to be well, that's also not exclusive with needing to join a pitchfork brigade. Outrage is rarely a good attribute for problem solving.

by Chaosinflesh | 9th Nov 23, 9:28am 1699475298

Fix the greed, fix the problem. (Being over-leveraged is a symptom, not the problem itself).

Easy fix for greed - real interest rates.

John was talking about artificially reducing house prices, when in fact, what was artificial was the low interest rates certain vested groups enjoyed and promoted.

For the record, I don't begrudge people their mortgages (we chose to continue renting, but not everyone has that choice) - but the reality is if they took a mortgage they couldn't afford, that's on them not me. At the end of the day - the banks are a business, not your friend - and they want as much of your money as you'll give them.

I do judge those who acquired more property than they need to the detriment of others; I doubly judge those who see other humans as their rent-slaves by right (the difference is shown in attitude, reflected in the language of 'landlords subsidising rent' vs 'tenants subsidising our mortgage[s]'); and I triply judge those who used debt to do so, then whinge about how much it costs.

by Pa1nter | 9th Nov 23, 9:33am 1699475585

Greed is written about in the bible, it's not going anywhere. We can see house prices stabilising, or even increase, even though investors as a percentage of buyers are decreasing, and owner occupiers increasing. So the story of why houses cost what they do, has many other governing factors.

You don't really want more of your country than the next person, you're just extra judgy, which inhibits how accurately you can address the issue.

by JimboJones | 9th Nov 23, 9:44am 1699476245

We definitely saw house prices go up as a result of the very low interest rates from COVID, and they have come back down with higher interest rates. But then again high interest rates do not make houses more affordable unless you happen to be paying with your own cash.

by Pa1nter | 9th Nov 23, 10:07am 1699477623

But interest rates are higher than 2019, while prices are at or above the same time.

It's undeniable there's a link between the cost of debt and what people can afford to buy. But if the interest rate was 20%, houses wouldn't be cheaper to produce.

by JimboJones | 9th Nov 23, 10:45am 1699479943

Good point, more houses should be built with lower interest rates for 2 reasons, because it is cheaper to finance them and because house prices will be dearer so it makes more sense to build.

And affordability is actually now at an all time high, assuming you need a mortgage it was easier to buy when prices were higher and interest rates lower. High interest rates do not improve affordability.

So it seems low interest rates are actually very good for housing affordability!

by longjohndrop | 9th Nov 23, 11:32am 1699482775

THIS is what i was trying to convey.

We need to solve an underlying supply issue, low interest rates are probably all things considered one of the best tools to resolve that. Any affordability spikes will be resolved by supply matching demand (look at Europe).

by RickStrauss | 9th Nov 23, 1:11pm 1699488665

Which means tackling demand for two things: 1) housing, and 2) an artificially supported investment class.

Both could be tackled by a few changes in policy:

1. Not using monetary policy to protect property prices in hard times

2. Liberalising zoning

3. Adjusting taxation to reward housing creation (and other value-adding activities) and disincentivise speculating on existing stock.

We could also remove welfare subsidies for rental yields and prices.

by Chaosinflesh | 9th Nov 23, 10:00am 1699477255

But there are others who do want more of their country than others.

Just because something has always been one way, doesn't mean it couldn't (or shouldn't) be another.

Their is a difference between complacency and contentment.

How does my jugdement inhibit my ability to address the issue, btw? I have provided many posts in the past discussing various actions that could be taken, and their potential effectiveness. But in the here-and-now (not hypothetical future, so absent any legislative/regulatorial changes) we only have one main lever to pull. Interestingly, that lever is largely controlled by fear, not greed, but the greed exacerbates the fear.

Greed stepped in when fear prevailed, and now fear quails that greed prevails.

by Pa1nter | 9th Nov 23, 10:38am 1699479495

I just find in life the people walking into the room playing pointy finger and preaching fire and brimstone usually aren't the most adept at critical thinking and solving problems, they're just miffed.

How do we gauge who wants what more, by volume and frequency of complaints?

by Chaosinflesh | 9th Nov 23, 10:46am 1699479972

Do you consider yourself an adept critical thinker?

Just keep editing your posts, maybe you'll say what you mean to eventually.

by 1689 Baptist | 9th Nov 23, 2:13pm 1699492386

The Bible speaks of greed in two ways with equal measure. Those withholding from others, and those coveting the wealth of others. It is not a sin that only the rich must repent of.

by GetFeeling | 9th Nov 23, 8:35am 1699472111

Who did you vote for at the last local body election? A mayor and councilors kicking NIMBYism into touch? A mayor and councilors embracing higher densities and public transport?

And the general election? Did you vote for National or ACT who want to stifle housing developments to protect landowner's "investments" and cut taxes for landlords while ensuring they continued to received their ill gotten gains tax free?

Anyone that can't answer Yes to the first question and No to the second is where the real problem lies.

by HGWR | 9th Nov 23, 8:41am 1699472473

An OCR below inflation is not "punishing everyone who uses debt".

by JimboJones | 9th Nov 23, 9:10am 1699474259

Agree, the RBNZ has actually artificially encouraged debt rather than punished it. The current interest rates are just a return to something slightly sensible.

by Greg-Hamilton | 9th Nov 23, 8:18am 1699471092

I guess migration is the important factor in HPI expectation.

But how people are assuming affordability is beyond me. May be they expect interest rate to come down or even immigrants bringing in money for a healthy deposit..?

by JimboJones | 9th Nov 23, 8:22am 1699471333

Your numbers are the past, the surveyed numbers are predictions of the future.

Individual increases are almost meaningless, you need to multiply it all out and find the total increase. Stats NZ do exactly that based on a typical basket of goods and services, and they say prices only rose 5.6% on average in the last 12 months. An 11% increase in wheelie bin sounds a lot, but it makes very little difference to your yearly spending.

In our household our internet bill hasn't changed in 4 years, our power bill is fixed for 2 years, and while food prices are up a lot, they seem to have come down a bit recently. 5.6% is probably about right for us, mostly due to food and petrol.

by GetFeeling | 9th Nov 23, 8:14am 1699470887

One can't help conclude when looking at Figure 1: Annual inflation expectations - when the RBNZ had the OCR at 0.25% and retail interests rates were about 2.5% - that in July/Aug 2021 the RBNZ should have been able to conclude their actions were about to trigger inflation.

TBH - they should been able to conclude that way, way before then. I would love to see why the RBNZ's MPC thought such extreme and radical action was necessary. An enquiry is justified.

by nktokyo | 9th Nov 23, 8:20am 1699471220

Mate at Bunnings says the building suppliers are still going to hike this year, despite international prices declining and volumes of work collapsing.

Lucky industry aye.