Inflation expectations rise sharply, pointing to an imminent RBNZ rate increase
Official cash rate (OCR) increases are moving closer after the Reserve Bank’s latest Survey of Expectations showed stronger short‑ and medium‑term inflation pressures.
ASB senior economist Mark Smith said, “OCR hikes are a matter of when and not if,” with respondents now seeing a steeper policy track over the year ahead, even though longer‑term rate expectations remain slightly below ASB’s circa 3.25% neutral estimate.
The Q2 survey, conducted after the March quarter CPI held at 3.1%, found one‑year‑ahead CPI expectations now sit at 3.41%, up from 2.59%, and two‑year‑ahead expectations have risen to 2.53% from 2.37%, according to interest.co.nz.
Smith notes that with annual inflation having been at or above 3% for close to a year and widely publicised cost increases in train, the lift in near‑term expectations is unsurprising. He says the shift in the two‑year horizon “suggests participants are acknowledging some risk of high near-term inflation proving to be more persistent.”
Long‑term expectations ease back towards target
In contrast, longer‑run inflation expectations have edged down towards the RBNZ’s 2% midpoint target. The survey shows five‑year‑ahead expectations now at 2.22%, from 2.31%, while 10‑year‑ahead expectations have slipped to 2.19% from 2.30%.
Smith observes that, “What would have been more encouraging from the RBNZ’s point of view would have been the pullback in longer-term inflation expectations,” signalling that the longer‑term inflation anchor remains intact even as short‑term pressures persist.
Housing, wages and growth paint softer backdrop
Expectations for house price inflation have been pared back. The mean one‑year‑ahead view for annual house price growth has dropped to 0.33% from 2.37%, and the two‑year expectation has eased to 2.80% from 3.44%, a change Smith says will “cause few sleepless nights at the RBNZ”.
Survey participants have also marked down their outlook for real GDP growth over the next two years, while anticipating higher unemployment and slightly stronger wage inflation.
Against this softer growth backdrop, Smith cautions that “If evidence points to a generalised and persistent uplift in inflation emerging, more proactive monetary normalisation is warranted, particularly with a troublesome short-term inflation outlook and with the 2.25% OCR below circa 3.25% neutral levels.”
RBNZ is expected to compare these findings with upcoming household and business expectations surveys before deciding how quickly to move on the OCR.
Stay informed with the latest housing market trends and mortgage insights — subscribe to our free daily newsletter.