Influential RBNZ survey shows another decisive drop in the expectation of future levels of inflation in a result that will give the RBNZ comfort ahead of its Official Cash Rate decision next week

An influential survey conducted for the Reserve Bank (RBNZ) has shown further significant falls in the level of expected future inflation in a result that will give the RBNZ substantial encouragement ahead of its Official Cash Rate review next week.

The key results of the latest Survey of Expectations, carried out quarterly for the RBNZ, show that the level of inflation in two years' time is expected by respondents to be 2.33%, down from a reading of 2.5% in the last survey.

For one-year-out the expected inflation figure has dropped to 2.73% from 3.22% in the previous survey.

These results are significant. The RBNZ targets achieving inflation in a 1% to 3% range - but actual annual inflation has been outside of that range (it was 4% as of the end of the March quarter) since June 2021. The RBNZ is forecasting it will get inflation back under 3% by the third quarter of this year.

The latest survey of expectations is the first time since the survey for September 2021 that all the inflation expectation results have come in under 3%.

The survey also features forecasts of inflation for five years' time and for 10 years' time. The five-year figure has remained at 2.25 - same as in the previous survey - this time around, while the only slightly discouraging note is that the 10-year figure has crept up to 2.19% from 2.16%.

But with the RBNZ specifically targeting achieving a 2% inflation rate, the central bank will be cheered to see all the expectations starting to converge around that level.

This survey has in the past carried quite a bit of weight with the bank (possibly not so much these days) ahead of making its OCR decisions, so these results will certainly be front of mind for the RBNZ's Monetary Policy Committee as it assembles to make the call on the OCR on Wednesday, May 22.

And the positive nature of the results will help to underpin the sentiment that the OCR will be kept on hold at 5.5%.

As well as fighting the actual level of inflation the RBNZ has to battle to ensure that high expectations of future inflation don't get ingrained into people's thinking. Because these expectations of future inflation will feed into pricing behaviour, which then causes renewed inflation.

The results in this latest survey come after annual inflation as measured by the Consumers Price Index (CPI) came in at 4% as of March, down from 4.7% in the December quarter.

And the results in the latest survey come despite some doubts in the marketplace about continued 'stickiness' in domestic inflation, something demonstrated again on Monday by the latest Selected Price Index data, including food and rent prices, from Statistics NZ.

The RBNZ said 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 April 2024.

Clearly the sentiment out there now is that the battle against inflation is being won.

However, if anybody wants to find anything in the latest survey that's less cheery, they can take a look at the expectations for future levels of house prices. Having picked up markedly during 2023, these have fallen quite significantly in the latest survey - reflecting the fact that the head of steam the housing market appeared to be building towards the end of 2023 has evaporated.

The RBNZ says the mean one-year-ahead expectation for annual house price inflation dropped by 1.39 percentage points to 3.43% from the previous quarter’s estimate of 4.82%. The mean two-year-ahead expectation for annual house price inflation was 4.74%, with a decrease of 1.04 percentage points from last quarter’s mean estimate of 5.78%.