Today’s survey was a mixed bag for the RBNZ. Inflation expectations were down at shorter horizons. However, expectations for inflation at longer horizons have picked up and they remain above 2%.
Inflation expectations
- One year ahead: 3.60% (Prev: 4.17%, down 0.57 points)
- Two years ahead: 2.76% (Prev: 2.83%, down 0.07 points)
- Five years ahead: 2.43% (Prev: 2.25%, up 0.18 points)
- Ten years ahead: 2.28% (Prev: 2.22%%, up 0.06 points)
November’s update on inflation expectations was a mixed bag for the RBNZ. Inflation is expected to continue dropping over the next few years and it’s expected to be back below 3% within two years. However, the survey’s respondents are looking increasingly sceptical that inflation is heading back to the 2% target midpoint anytime soon.
Looking at the details of the November quarter report, expectations for inflation one year ahead have dropped sharply, falling from 4.17% in the previous survey to 3.60% now. That’s a large fall and follows the lower-than-expected September quarter inflation result – inflation in the year to September was 5.6%, below the RBNZ’s forecast for a 6% rise.
Similarly, expectations for inflation in two years have nudged down from 2.83% to 2.76%. That’s not a big change, but the RBNZ will take some comfort from the fact that expectations at this closely watched horizon 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 ten years ahead have picked up and remain above 2%.
Overall, the results of today’s survey won’t prompt any change in the RBNZ’s stance at its upcoming November policy meeting. The RBNZ is set to keep the OCR on hold at 5.50%.
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.
We’re 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.
Lastly, expectations for house prices have continued to rise. The survey’s respondents now expect house prices will rise by 4.8% over the coming year (previously, a rise of only 1.4% was expected).
