A survey the Reserve Bank pays close attention to has shown a significant drop in the expectation of future levels of inflation.
However, the results of the latest Survey of Expectations, carried out quarterly for the RBNZ, are unlikely to deter the central bank from another 50 basis-point hike in the Official Cash Rate when this is reviewed again next week - on August 17.
The data for survey was obtained from 35 business leaders and professional forecasters by the Nielsen group on behalf of RBNZ. Field work for the survey was run between the July19 and 25 - which, significantly, was after the release of the most recent inflation figures, showing annual inflation of 7.3%, when the RBNZ had expected just 7.0%.
The key survey statistic is always what the surveyed experts view inflation will be in two years' time. The RBNZ is always looking for expectations to be 'anchored' around 2% which is the explicitly targeted level of the RBNZ's 1%-3% target range. Recently as actual inflation has taken off these expectations have become seriously unmoored and have risen rapidly.
In the latest survey, however, the two-year-out expectation has fallen to 3.07% from 3.29%. In the context of these surveys that is a big fall and it will please the RBNZ a lot, showing to the central bank that its efforts to convince people it is deadly serious about knocking out inflation are being taken on board.
But of course, 3.07% inflation in two years' time would still see the inflation rate outside the RBNZ's target range, so it will not feel its work is finished yet in convincing people - so, it will probably still follow through with another 50 point rise to the OCR as widely expected next week, taking it up to 3.0%.
However, I would say the results of the latest survey may well cast some doubt on whether there will be another 50 point follow up - as many have also expected - in the October OCR review. Perhaps a follow-up 25-point move becomes more likely.
ASB senior economist Mark Smith said the findings of the latest survey "would have been very reassuring to the RBNZ".
He said the survey showed respondents to the survey were looking beyond rising observed inflation rates, with the weakening activity outlook (growth expectations at post-GFC lows) expected to cool short-term inflationary pressures.
"Furthermore, longer-term inflation expectations remained closely anchored around 2%, downplaying the risk of a prolonged inflation overshoot. We caution that this is just one survey with a low number of responses, but it suggests that the RBNZ have not lost the battle on inflation.
"We expect a 50bp OCR hike next week, and for the OCR to move higher over 2022 as the RBNZ strive to get inflation under control. Once that is done, the OCR can be lowered, and we expect OCR cuts from 2024."
For the RBNZ, removing expectations of higher inflation is arguably a bigger part of its task than tackling actual inflation - since its the expectations people have of the future rate of inflation that drive pricing behaviour. Therefore if people expect inflation they put their prices up - which leads to higher inflation.
In other results in the survey, the expectation for one-year ahead inflation dipped very slightly from 4.88% to a still very high 4.86%, but the five-year ahead expectation dropped to 2.33% from 2.42%, putting it closer to that 2% level the RBNZ likes to see expectations at.
The 10-year ahead expectation actually rose very slightly, to 2.13% from 2.11%. More details of the survey results here.
A more recent addition to the questions in this survey (since 2017) has been to seek views of respondents for their expectations of the annual percentage change in the house prices in the September quarter of 2023 (one year ahead) and 2024 (two years ahead).
Expectations for one-year-ahead house price change had a mean of -5.84%, a further decrease from last quarters mean of -4.37%. The RBNZ says this figure is the biggest expected one-year-ahead decrease in house prices since this question was introduced in September 2017.
"The responses indicate that, in general, house prices are expected to decrease, however a wide distribution of values, point to a heightened level of uncertainty over the next twelve months," the RBNZ said.
"Mean two-year-ahead house price changes were higher at 1.93%, which is an increase from last quarter’s mean estimate of 1.74% - the first time two-year-ahead expectations have increased since December 2020."
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