NZ First Impressions: RBNZ Survey of Expectations, Q2 2024

Inflation expectations have continued to fall. That will help to quell the RBNZ concerns about the longer-term inflation outlook.

Inflation expectations

• One year ahead:  2.73% (Prev: 3.22%, down 49 points)
• Two years ahead:  2.33% (Prev: 2.50%, down 17 points)
• Five years ahead:  2.25% (Prev: 2.25%, unchanged)
• Ten years ahead:  2.19% (Prev: 2.16%%, up 3 points)

Expectations for inflation over the next few years have continued to drop back in the RBNZ’s latest Survey of Expectations. That follows the fall in actual inflation in recent months.

Looking at the detail of the June quarter report:

• Expectations for inflation one year ahead have fallen sharply for a second quarter, dropping to 2.7%, down from 3.2% in the previous survey.
• Similarly, the closely-watched 2 years ahead measure dropped to 2.33%, down from 2.50% last quarter. This measure is now back around the average seen since 2002 (when we shifted to a 1 to 3% target range for inflation).
• Expectations for inflation 5 and 10 years ahead held broadly steady a little above 2%.

The importance of this survey in the RBNZ’s policy deliberations has fallen over time, with the RBNZ instead preferring to look at a range of different measures of inflation pressures. Even so, today’s result will be welcome news for the RBNZ, and will help to reinforce expectations that inflation will continue to drop back over the course of this year.

The big question for the RBNZ is “how fast will inflation decline?” Over the past year we’ve seen that domestic inflation pressures are proving to be ‘sticky’ – lingering at higher levels than the RBNZ and other forecasters (including ourselves) have expected. Consistent with that, this morning’s monthly price update from Stats NZ pointed to continued upside pressure. While today’s fall in inflation expectations will help to quell concerns about the persistence of domestic inflation, we still think that inflation will fall more gradually than the RBNZ has assumed. Consistent with that, we’re not forecasting rate cuts until early next year.