By David Hargreaves
The latest quarterly Reserve Bank Survey of Expectations, has shown a big jump in the anticipated rate of inflation over the next two years.
Normally expectations don't move much from survey to survey, but in the latest one the expectation of inflation two years out has risen sharply from 1.68% to 1.92%. That's a very big move by the standards of this survey.
The dollar jumped on the news by nearly half a cent to over US73.5c and was flirting with five-month highs against the American currency.
Expectations of shorter term inflation - for a year ahead, had a similarly sharp rise, moving up from 1.29% to 1.56%.
The survey of expectations is watched very closely by the RBNZ.
After the February 2016 survey showed a sharp fall in inflation expectations, with the two-year-out figure dropping to 1.63% from 1.85%, the central bank followed up within a month with a cut to the Official Cash Rate.
On the one hand the central bank will be pleased to see inflation expectations moving up toward the middle of its 1% to 3% targeted rate of inflation.
But ironically the move in sentiment might be a bit too fast - and will back up expectations in the marketplace that official interest rates might have to rise as soon as later this year.
The RBNZ makes its next call on interest rates this Thursday and is universally expected to keep the Official Cash Rate at 1.75%.
However, the market will be looking closely to see what the RBNZ comes up with in terms of inflation forecasts and what it says about the likely future path of interest rates.
Its last detailed forecasts released in November indicated no change in official interest rates before the end of 2019.
Most of the big bank economists believe the market expectations of interest rate hikes this year are overblown, but certainly some economists are now expecting rate rises next year.
There's some expectation that the RBNZ might need to paint a particularly 'dovish' picture in its comments this week to prevent the already high Kiwi dollar from rising further.
The Reserve Bank Survey of Expectations asks a sample of economists, business and industry leaders questions relating to perceptions and expectations on a range of economic indicators.
ASB economist Kim Mundy said given that the survey period was before the stronger-than-expected December-quarter Consumers Price Index result, "we were not expecting inflation expectations to have rebounded to this degree just yet".
"However, the inflation outlook has changed significantly since the Q4 survey, boosted in part by higher petrol prices, which could have played a part in the strong upward move."
Mundy said despite the move higher in inflation expectations, ASB economists do not think the result will have changed the RBNZ’s near-term interest rate outlook.
"Downside risks to the inflation outlook remain, especially the high NZD, and we think the RBNZ will wait for further evidence of sustained price rises before considering lifting the OCR."