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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

Bonds / analysis
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
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Source: 123rf.com

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%.

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20 Comments

Inflation is gone. Unemployment is increasing, job security has become front of mind. Wage pricing pressure has therefore evaporated. If there's no wage pressure there's no demand-push inflation left. Let's hope the RBNZ get their eyes on the road ahead rather than focussing on the rear vision mirror. 

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9

Hey Don, expecting the RBNZ to be more forward looking? You must be an optimist!

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3

Any change by the RBNZ now will take 6 months (at best) to have any effect. They should have acted six months ago. Like Nov '23!

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2

Is it a realistic possibility that there could be a cut next week? 

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1

I would say it's a long shot but wouldn't rule it out. They certainly should be cutting IMO.

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5

I think it's unlikely but possible.

and when OCR drops, I won't be surprised CPI drops faster for a while before it's stabilized. 

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The drop in demand is stark. Within a few months demand has collapsed. In most industries I’ve talked to, so many different people talking about layoffs, job security etc. A cosmetic surgeon (one of Aucklands leading) told me his business has evaporated on the want/need/demand side (ie anything that isn’t a must/need/insurance covered isn’t happening anymore. Flow on effect think of dentists, mechanics, building anything that isn’t necessary is having the plug switched off. The economy is already in the toilet and even when the reserve bank cuts it’s going to be far too late. I can see unemployment reaching 5% by September 30 easily.

As soon as business start realising they can’t increase prices anymore (which is now) the quick cost cutting begins and the easiest thing to cut is jobs. 

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6

I think you are absolutely right…rough ride ahead, after a turbulent couple of years. Not sure what the fix looks like & how it works?

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2

The thing to really cut is debt. Oh wait...the time to do that was the lowest period in NZ history. How many actually did vs opting for a new Ranger, wake boat and or bach...?

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7

Sounds to me that A Orr has zero interest in unemployment levels, since the mandate was removed. He is probably happy seeing unemployment increase

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No one on this forum is surprised. It's been talked about for months. The next "surprise" will be unemployment.

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Golly. Makes reading entrails look quite scientific.

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1

so Buy AUDNZD for the next month.....

 

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Perhaps those with more experience than I can answer a question. Assuming the OCR comes down by 25 points later this year, how long will it take for retail rates to come down? And by how much?

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1

Interest.co.nz has two graphs (See Charts in the menu bar at the top of each page)  that will help you here.

OCR track back to 2001: https://www.interest.co.nz/charts/interest-rates/ocr

Fixed / floating mortgage rates back to 2003: https://www.interest.co.nz/charts/interest-rates/fixed-mortgage-rates

In short ... the banks are slow to move  ... but negotiate hard and you'll get much, much better than carded and pick up recent OCR falls.

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They move in step, but the rates are being cut for a reason, at the same time its normally more difficult to get new / additional credit.

The more important question is what is a neutral OCR rate that will keep inflation inside the band, not to hot and not too cold....  

My gut tells me its about 125-150 points lower then it is now......    what does this mean for the NZ Economy.

Property investors and OO have a mountain of debt to repay, DTIs coming and a RB that will not want wage growth to reignite.

Its hardly animal spirit stuff

 

 

 

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"Higher. For Longer." - Nothing substantial has changed. 

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I would guess a surprise cut between 10-20 points next week when I saw Kiwibank dropping the 1 YR rate to 6.99%, plus too much news about not cutting for longer, to me sounds like expectation control and more likely for a surprise small cut.

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2

It's pretty bad out there - I work with a lot of people taking out lending, and I don't have a single person saying things are better than 2021. In fact, one of the first questions I get asked now is "suppose one of us loses our job, what happens".  

Full credit to kiwis though, a lot of my clients are asking the right questions - "we're ok now, but we're worried just in case, how do we protect ourselves in case we lose our incomes". Such a far-cry from the Bollard days where kiwis really did spend like no tomorrow with a lot of financial ignorance. 

 

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So if you add yearly CPI & Housing inflation together you will get to 6.6% real inflation.

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