Record inflation expectations force RBNZ's hand — ASB
New Zealand's inflation outlook has deteriorated sharply, with business inflation expectations jumping to their highest level on record in the RBNZ's Q2 Business Survey of Expectations — a result that ASB economists say makes OCR hikes not a question of whether, but when.
ASB is not alone in that view. A Reuters poll of 29 economists published this week found just over half now expect one or two OCR hikes by end-September — a sharp shift from April, when only eight of 30 held that view. The median forecast has the OCR reaching 2.75% by year end and 3.00% by end-Q1 2027.
The RBNZ's own Q2 Business Survey of Expectations shows why that consensus has shifted so quickly. Conducted across 796 businesses between 22–30 April — after the Q1 CPI print of 3.1% was released — the survey showed one-year-ahead mean inflation expectations surging from 2.59% in Q1 to 3.41% in Q2, the highest reading on record.
Two-year-ahead expectations also rose, climbing to 2.87% from 2.59%. The lift was broad-based: short-term inflation expectations increased across every business size and industry surveyed, from retail and construction through to manufacturing and primary industries.
Longer-term expectations held largely steady but remained well above the RBNZ's 2% target midpoint — five-year expectations sat at 2.72% and ten-year at 2.94%. ASB warned this persistence is problematic.
"High business inflation expectations could make the return to sub 3% inflation more difficult and could result in a more persistent overshoot of the 1-3% inflation target," said Mark Smith, ASB senior economist.
Household expectations also rising — a warning sign for the RBNZ
The deterioration is not confined to firms.
The Q2 Tara-ā-Whare Household Expectations Survey, released the same day, showed a widespread lift in inflation expectations across all future time horizons — notable given the subdued household demand backdrop and weakening house price outlook.
Household current inflation expectations sit at 7.5%, with one-year-ahead expectations at 5.6%, up from 5.2% in Q1.
Labour market expectations from the business survey also caught ASB's attention.
Firms anticipate the unemployment rate rising to 5.5% one year ahead — higher than the 5.18% forecast in Q1 — yet short-term wage inflation expectations have lifted regardless, with one-year-ahead wage growth expectations edging up to 2.81%.
The combination of rising wages and rising prices, even against a backdrop of expected labour market slack, is precisely the dynamic the RBNZ will be most alert to heading into next week's meeting.
ASB tips July start — but says May cannot be ruled out
ASB's base case is a July start to the OCR tightening cycle, but the bank is explicit that an earlier move is possible.
"OCR hikes are a matter of when and not if,” Smith said. “Proactive monetary normalisation looks to be warranted, particularly with a troublesome short-term inflation outlook and with the 2.25% OCR below circa 3.25% neutral levels. We have pencilled in a July start to hikes but note it would be unwise to rule out the RBNZ hiking the OCR next week."
The cost of delay, ASB argues, is a longer and more painful tightening cycle down the track.
"Holding the OCR at 2.25% is not without cost if it results in a more generalised and protracted uplift in inflation emerging that will require monetary restraint to dislodge," Smith said.
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