Economists say the Reserve Bank (RBNZ) will be wary of new survey results that show a drop in shorter term inflation expectations but a rise in longer term expectations for both inflation and interest rates.
The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, showed meaningful drops in the expectation of the inflation levels both in a year's time and in two years' time.
However, expectations for both five years' and 10 years' time both actually showed increases, albeit that both expectations were for inflation to be within the RBNZ's targeted 1% to 3% level.
Inflation as measured by the Consumers Price Index (CPI) was at 5.6% as of the September quarter 2023. The RBNZ has been pushing the Official Cash Rate up strongly since late 2021 in order to take the heat out of the economy and bring inflation down. The OCR is currently at 5.5%. Whether it will be increased again, or indeed will start to be dropped is the matter for healthy debate in the market place.
The economists at ANZ and Westpac among the major banks still think the OCR will need to be raised again. However, wholesale interest rate markets are now pricing in about a one-third chance of an OCR cut as early as May next year, and the markets are actually currently pricing in two whole cuts (of 25 basis points) to the OCR by the end of 2024.
Westpac senior economist Satish Ranchhod said the RBNZ will take some comfort from the fact that expectations at the "closely watched" near term periods "are gradually edging down".
"Similarly, expectations for wage growth over the next few years have also been softening.
"However, the survey’s respondents are more circumspect about the outlook for inflation further ahead. Expectations for inflation five and 10 years ahead have picked up and remain above 2%," he said.
The results of thes survey won’t prompt any change in the RBNZ’s stance at its upcoming November 29 policy meeting, with central bank set to keep the OCR on hold at 5.50%, Ranchhod said.
"However, the persistence in longer term inflation expectations does reinforce the likelihood that the RBNZ will have to keep the OCR at elevated levels for an extended period to get inflation back to levels consistent with its target."
Likewise, ASB senior economist Mark Smith said if the "upward revisions" in longer term inflation expectations persist "it could mean higher OCR settings will be needed, all else equal".
"Our view remains that the OCR will peak at 5.50% this cycle. Nonetheless, OCR cuts still look some way off (as late as early 2025, but potentially slightly earlier) and the RBNZ will be wary given the risk that high current rates of inflation will be slower to recede than they would like."
Smith also said it would be of worry to the RBNZ that longer-term OCR expectations (in the survey) were revised up (to 3.16% 10-years ahead) as were expectations for longer-term NZ government bond yields (10Y 4.88% 1-year ahead from 4.15%) "reflecting a high for longer interest rate view".
"The RBNZ will be wary for further signs of uplift."
Ranchhod reiterated that Westpac is forecasting another rate hike from the RBNZ next year.
"Given the lingering strength in domestic inflation and inflation expectations, we don’t think rate cuts will come on to the table until early 2025."