sign up log in
Want to go ad-free? Find out how, here.

Influential RBNZ survey shows considerable rise in expectations of inflation in two years time, with a rate of 3.62%, and even the much longer-term expectations for five years and 10 years have risen above the RBNZ's explicit 2% target

Bonds / analysis
Influential RBNZ survey shows considerable rise in expectations of inflation in two years time, with a rate of 3.62%, and even the much longer-term expectations for five years and 10 years have risen above the RBNZ's explicit 2% target
inflation-balloons2

A survey the Reserve Bank pays close attention to has shown another sharp rise in the expected levels of future expectation in an indication that the central bank is not yet seen as getting inflation under control.

The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, are likely to carry a lot of weight with the central bank in making its next decision on the Official Cash Rate on November 23. At the moment the OCR is at 3.5%.

The key result in the survey is that the expectation for inflation in two years' time - the most watched measure in the survey - has risen very sharply to 3.62% from 3.07% three months ago. If this expectation came to pass it would mean inflation would still be outside of the RBNZ's targeted 1% to 3% range by the end of 2024.

And of course it would be well above the RBNZ's explicit 2% target.

But even looking further forward, there's not much encouragement for the central bank. 

According to the latest survey the expectation in five years' time is that inflation will be on 2.44%, up from 2.33% in the survey three months ago. 

As for the story looking 10 years out, well the latest survey has an expectation of inflation at 2.18%, up from the previous survey figure of 2.13% and of course again above the explicitly targeted 2% figure. In 10 years time. 

Westpac senior economist Satish Ranchhod said the strong increases in the survey "will no doubt be a worrying sign for the central bank".

"Interest rates have been on the rise for over a year now. However, underlying inflation is not showing signs of easing. And now, with inflation expectations pushing higher, there’s a risk that the inflation cycle could be even more protracted. That’s because expectations are a key input into how businesses adjust wages and prices, and their creep higher signals ongoing price pressures over the year ahead. 

"We’re forecasting a jumbo-sized 75bp [basis-point] rise at the RBNZ’s next policy meeting on 23 November. Today’s strong result means that sort of extraordinary rate rise is even more likely," Ranchhod said.

The data for this survey was obtained from 33 business leaders and professional forecasters by the Nielsen group on behalf of RBNZ. Field work for the survey was run between the October 19 and 25, 2022.

As stated above, the key survey statistic is what the surveyed experts view inflation will be in two years' time. The RBNZ is always looking for expectations to be 'anchored' around 2%. Recently as actual inflation has taken off these expectations have become seriously unmoored and have risen rapidly.

Since the last survey results came out in early August there's been release of GDP figures in September, inflation figures in October and labour market (unemployment and wages) figures just last week. The last of those three data releases was not released before this survey was actually conducted, but the inflation figures most certainly were.

All of that data was 'hot', mostly surpassing expectations of economists with the sheer strength of the figures. For its part the RBNZ got very close to picking the GDP number, missed by a long way on inflation and had unemployment figure right and was closer than anyone on wage rises - but still came in slightly too low with its private sector hourly earnings increase figure that other economists had tended to look at with raised eyebrows because it was so much higher than other people's picks.

But of course in all this data it's the unpleasant inflation surprise that's truly the biggie - and has led to the kind of result we've seen in this latest survey.

In many respects this survey series can increasingly be viewed as a measure of the RBNZ's credibility in achieving its inflation target.

What the current results are telling you is there's doubt out there that the RBNZ is on track to rein in the inflation beast. Confidence has been knocked. That's a bad thing because if people don't believe that the RBNZ can tame inflation then we will see future price setting behaviour incorporating ongoing expected levels of high inflation. And this can be self-fulfilling.

It's another complication in already complicated scenario for the RBNZ as it decides what to do in its November 23 Official Cash Rate review. And of course yet another complication is the fact this is the last OCR review for 2022 and the next one's not for three months - on February 22, 2023. 

Most economists are juggling between picks of either a 50 basis point rise for the OCR or a 75 point rise. Personally, I think these survey results - which will have a big influence on the RBNZ - make at least a 75-point rise a slam dunk. I do still think there's some chance we will see a 100-pointer.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

101 Comments

The Fifth Dimension was right afterall. 🚀

TTP

Up
4

“As of now, we can’t see the fifth dimension, but rather, it interacts on a higher plane than we do. It’s because of this that we can’t really study nor fully prove it’s existence.” 

I see your point TTP. Orr has no idea how to study or understand it. Great comparison!! 

Up
2

Its Putin's fault   ... supply chains ... the previous National government ... 

... trust us , it will peak and turn down after ... ummmm ... after it peaks... yes ...

Up
0

No worries. Mr Orr and Tane Mahuta have got this under control.

Up
17

Didn't Grant ( who said recently he was the best Finance Minister in the world ? ) say inflation had peaked ?

 

 

 

Up
8

Twin peaks?  A great early 1990s mystery TV series.

Up
2

Never fear, it is transitory 

Up
8

G-rob says a lot of things.

Up
3

1% increments from now on!

Up
17

Influential RBNZ survey shows considerable rise in expectations of inflation in two years time

With Adrian "Flation" Orr back in the drivers seat, expectations might still be too low yet.

Up
5

Rbnz strategy... Ask others what they think inflation will be and then run with that. Never mind that Orr is paid big bucks to at least have some idea himself. This Muppet just got reappointed for another 5 year term. If National win and then want to replace Orr, they will have to pay out his contract. Ridiculous politicking by robbo

Up
3

It’s actually not ridiculous politicking. It’s politicking in pure form. If he had of re-elected for 1 year then it would have screamed 0 confidence in labour winning. He kind of had to go the full 9 yards on that basis.

Up
4

A 75 bps raise is totally insufficient.

At the very least, a 100 bps increase must be enforced, together with an express statement by the RBNZ that a similar move will follow up in February, so to bring the OCR to 5.5%.

Anything less, and Orr will be forced to raise to a higher peak later on. If the RBNZ does not act with due urgency and determination, I can easily see an OCR peak of 6 or even 7% by end of the next year. 

I do hope that Orr is finally getting it - even a muppet like him should by now have learned the lesson that an over-stimulatory monetary policy only creates inflation and forces much tighter monetary settings later on. 

Up
24

Yes because between November and February the RBNZ are asleep at the wheel while other countries will keep raising rates.

Up
15

Inflation should start coming under control next year when the big recession hits.

Up
8

YES

Up
1

Especially imported inflation. 

Up
0

Maybe not so sure about that. This is both a Fiat and Geopolitical crisis.

Up
2

Yeah sorry was being sarcastic. It seems like we are all set for a recession and more inflation.

Up
3

Fiats have always caused crises. Fix It Again, Tony, as they're known. 

Up
0

Well now that he has his job secured for another 5 years, he's now free to actually do his job, instead of holding back for fear of upsetting his masters (or mistress in this case)

Up
3

Bit harsh calling grant his mistress 

Up
3

Why do they only meet once between Sept and Feb?  These meetings should be monthly, as should be release of statistical data

Up
2

In theory not much is going on between December and January and under normal conditions the OCR doesn't need monthly adjustments.

Up
2

I think a low OCR and govt spending will stoke inflation.

Up
1

good timing,like getting elected mayor and then pulling out a big increase in rates.

Up
1

Had a good laugh at the 10 year predictions, they cannot even get the 6 month correct.

Up
25

Haha, lol

Up
2

I would take this with a grain of salt. It pretty much ignores the reality of a hard recession hitting next year and the demand destruction that comes with that.

Up
9

Demand impacting inflation assumes a highly competitive market, and no constraints on supply. Something we do not have in NZ on any good or service.

Domestically lack of demand is more likely to lead to lack of product rather than lower prices. Companies will just drop anything that is not selling.

We may even see prices to increase, as firms try and ensure revenue remains on track.

Up
14

I'd have thought, for durable goods, if Xmas doesn't meet expectations then prices might decrease considerably if shipping costs continue to drop and NZD continues its upwards trend.  

Up
2

NZD is certainly bucking the trend. A few people were saying a month back that the NZD would be lower than 52 USD and 80 JPY by now. I remember Keith Woodford being one of them. I had mentioned that the NZD had oscillated regularly between 82 and 87 JPY for many many months and that would continue, rather than sink well below 80. And there it is back up at 87.

Up
4

Well done! Chocolate fish for you HM.

Up
5

Its all part of the interest.co game. Alarmist predictions to start a trend rolling, one way or t'other. 

Btw the latest Grand Designs was a $1.7m 135sqm round house in waikanae. More money than cents (deliberate misspell) probably.

Up
2

I don't think I made any specific predictions about JPY but I'm well off the mark with the NZD at this point, which I thought would be heading below 55c before the end of the year.

As far as the JPY goes, it made no sense for it to drop by as much as ten percent either way, but yes, definitely has upcycled against what I expected to see happen. Although I'm much less invested in it now that I've paid for my car - but there's always the next project around the corner...

Up
0

We have a massive bottleneck in our country's main port (result of COVID and post covid redundancies that never recovered) and no short or medium plan to fix it. 

It now does not matter what shipping costs drop internationally - they will not drop locally because of our broken supply chain. 

Up
3

Good post. Like all these things there’s complexity at play, with inflationary and deflationary impacts. But I would bet on the deflationary impacts outweighing the inflationary impacts of demand destruction.

Most prices won’t go down but they probably won’t go up much as demand destruction strikes.

Also I would expect to see wage inflation diminish significantly as demand destruction commences.

Up
1

An excellent reason to see that the Monopolies, Duopolies, ClubBank and the like get the Standard Oil treatment.

Up
0

The governor is confident that inflation is under control, so that is all that matters.

Up
1

Fresh contract signed, tick.  Does it come with a trial period?

Up
2

Yep - 5 years or total economic destruction, whichever comes first.

Up
13

Businesses now have about $280 billion of loans (and rising) - the cost of servicing those loans is skyrocketing and a 75 point rise would quickly add another $2 billion a year to business input costs - taking total interest payment to around $17 billion per year.

Explain to me how increasing the costs of providing goods and services is supposed to reduce the price of those goods and services.

And, don't start with the 'zombie companies need to die' nonsense as if having less competition and more market consolidation will bring prices down.  

 

 

 

Up
6

If you increase the price of needs then people can't afford wants.

Demand for wants decreases, price of wants decreases to meet demand? 

Up
11

I get the theory, but businesses won't sell 'wants' for less than the price of producing them, they will just downscale production to match the demand at the price that they want / need to charge. Downscaling often increases the production cost per unit (and therefore the price charged). Economic theory gets this last bit the wrong way round.

 

Up
5

Kind of but business resources are so stretched that the costs of producing that last product out the gate are higher than average, effeciency actually drops when trying to do too much with too little. NZ doesn't have the size to scale effeciently like say AUS so supply doesnt so effectively increase to meet demand. 

Up
0

That's fair - as ever with these things, it depends doesn't it? Some businesses might see efficiency increases at lower levels of demand, some will see decreases, some will see both depending on the level of production. I guess it just makes the point that broad assumptions based on simple models are often wrong.  

Up
1

Jfoe, the price of a good or service is not set by how much it costs to manufacture or provide it, the price is set by what customers can afford.  Higher interest rates means customers have less money left to afford said good or service, that's how higher interest rates, theoretically at least, are supposed to lower prices, hence inflation.

Up
2

In that case the housing market will be ugly for a good few years won’t it?

or do you subscribe to your hero Tony A’s view that the market will be much better by late 2023?

Up
2

nah, surely FHB's will be out in force in the New Year!

Up
2

First home someone's bought in NZ?

Up
0

Lol

Up
0

You see HM, it's when you make stuff up like "TA my hero" that your credibility evaporates.

You also know full well that I'm bearish about 2023, I made this very clear numerous times, I absolutely expect house prices (and other assets) to fall further in 2023.

It's just really poor form of you to make this stuff up.

 

Up
4

Beautiful simplicity Kjeldorian, well said!

Up
0

Zombie companies need to die.  To be purchased by another player with less debt and an ability to make it work.

Just think property and what will happen to zombie landlords.  The house will remain available.

Get it now?

 

Up
4

'Just think property'!! Have you looked at any research or data on what actually happens to rents when there is consolidation of rental property portfolios?    

Up
1

Rates were always going to go up people borrowed way to much for property, now that million dollar box in Auckland is not looking such a good purchase as house price’s crash banks will still want payment even if monthly payments double. Expect to see more housing stock on the market and a acceleration in house price crash. Speculators who were left holding the bag with a number of properties will be up to necks in crap.

Up
7

Rates are going up because RBNZ think that will bring the price of stuff down. They're wrong - and worse than that - they might set off a rates / inflation spiral as people / businesses respond to higher costs by seeking higher wages / prices.

 

Up
3

I think you are over simplifying it a bit there. A business can only seek higher costs until it cant. It will bring non-discretionary prices down. Staple foods wont and that's the scary part. The economy needs a recession reset.  The housing market badly needs one. That means temporary pain yes but what's your alternative measure if you are opposed to lifting rates and just letting inflation run for years and years?

Up
6

Exactly this.

The trouble in nz seems to be that  our fixed rate mortgage mentality means when Orr raises the OCR it takes forever for it to filter through to the consumers and the economy. It is kind of like watching a car crash in slo mo.

Surely each month more mortgages  and biz loans refix at a higher rate and the % of loans that are refixed (if its an average of 4 year terms thats 1/48th of the total loan holders each month)... 

Because we all saw it coming odds are a ton of people renegotiated last year then that that high percentage will have 4-5 years of a good rate to run?

So... my feeling it that it will only start to bite enough people (say 40%of total loans) to have an impact by mid to late 23 and be felt on mid 24? By which time if we keep raising then the ocr might be at over 8% and inflation approx 5-6%

Just a theory. Interesting to see the numbers.

 

 

 

 

 

Up
9

I thought something like 40% of mortgages were coming up for refinancing between now and mid 2023?

Up
4

Seems super high, that would've required people to have had ever decreasing interest periods for the past 5 years. 

If have thought a larger that usual amount of people locked in 4-5 year terms in 2020-2021.

Happy if someone can pony up some figures.

Up
0

https://www.macrobusiness.com.au/2022/11/jacinda-ardern-confronts-inter…

 

I still think this is the most telling chart of why we are in the calm before the storm for selling pressure: 

https://www.macrobusiness.com.au/wp-content/uploads/2022/11/Capture-31-…

 The average rate on the outstanding stock of fixed mortgages has gone from 2.8% to 3.8%~.  That figure will be steadily rising over the next 6-12 months with all fixed rates looking set to be north of 6%

 

Up
4

Why does the chart exclude 4 and 5 year mortgages?

Or is that average of under 4% in 2023 what we need to be looking at (i.e. is that including all rates including those 4-5 year mortgages still to run)?

Up
0

I genuinely don’t think that many people have 4-5 year mortgages.

Up
1

That chart is showing the remaining time on the term, not the total term length.  If someone took a 4 year fixed mortgage 3.5 years ago, they would show as ~6 months remaining on the chart

Up
4

Thanks, so it is circa 50% of mortgages being refinanced by mid 2023.

ouch

Up
3

Also there is only a percentage (was it 21%?) of people actually holding mortgages, and not all of them will be high value mortgages ~800k+ which will limit the impact of the OCR hikes and interest hikes on households. There will have to come a time again where renting is more costly than a mortgage and the mortgage seems more worthwhile however the way interest rates are going this will be a while yet, dependent on your location in the country of course.

Up
1

If the NZD continues to strengthen in lock-step with OCR increases, doesn't that actually serve to bring prices down?

Up
1

Theoretically yes, but look at a chart of the NZD, yes it has gone up for a couple of weeks but it's still in a serious downtrend.

Up
4

.

Up
0

DTHR, do you know there's more to the economy than houses?

Up
3
Up
3

Yvil NZ has some much going for it but over the last 10 years people have just been pumping up house price’s creating a huge imbalance in society a lot of money which has gone into housing could have been invested in business. All that is happening now is banks are making large profits and most of that will go out of the country and the banks have so many people in huge debt and will just cream for the top by raising rates for next however many years, they will not care if your struggling or if the property market crashes.

Up
3

You still only talk about housing.  This article is about the RBNZ and inflation.  This thread you commented on, started by Jfoe is not about housing either.

Up
4

Yes but housing has been a sure fire bet right up until the last 6 months or so and businesses are hard work and the majority of them fail leaving you with nothing. People just go where its the least risk, just common sense really the whole system has favored housing investment based on historic data..

Up
1

Can we start using the word "entrenched" yet?

Up
4

I think the word is "entrenchedsatory".

Up
15

Both ASB and ANZ are currently offering mortgage top up loans with an interest rate of 1% fixed for 3 years, of up to $80,000 to go buy a car.   What interest rate increase? What recession?

Up
6

And Westpac is offering up to $40000 interest free for five years.

Up
4

I'm already on that bus with some new insulation etc around the house. A no brainer.

Up
2

Would be better to spend 80k on a pool and then get that house on the market

Up
1

Mr Orr, Listen to experts in interest.co.nz  (comments section :)

Go for shock treatment by raising OCR,  more than what the market is expecting and this time the expectation is 0.75%, so go for full 1% as shock treatment will have the effect that even o.5% x 4 could not achieve.

Up
5

What do you actually think this will achieve? What is the causal chain between a 'shock and Orr' rate hike and a reduction in prices? 

Up
1

That's what I love about all the "the next interest rate hike NEEDS to be x percentage" shout outs.

Believing we'd be in any materially different place if any previous rate hikes were .25 or .5 higher is magical thinking.

Up
3

Mr Orr, Listen to experts in interest.co.nz  (comments section :)

Comedy gold!

Up
5

Why would anyone believe that inflation will return to the target range any time soon?

Up
5

The inflation we are seeing is mainly supply side, driven by energy costs one of which is manipulated  by restricting production e.g.  crude oil. Most people are spending most of their income on essentials. Aggressive raising of interest rates will only make things worse and crash the housing market.  Banks profits will rise and be sent offshore. The only thing that will effect them is if there are too many non performing loans and house re-possessions. 

Up
1

Crashing the ludicrously overpriced housing market will only make things better in the mid-long term…

Up
4

Haven't seen this being historically true so not sure why you'd think so now.

Up
1

Has there been a more useless bunch of Neo-marxists running this once great country?

Up
3

Really looks like fixing for 5 years at 4.95% was a good call. Not 3.99 good, but good 

Up
8

Expectation for inflation in two years' time

About on par for accuracy with "expectation for the weather in two years time"

Up
2

In two years it will still be spring so it will still be crap in Auckland at least. 

Up
2

A lot better than Spring in many places, including northern Europe

Up
0

I'll call this one "Monetary Policy":

Step 1) Central Planners make bed by scattering lovely cash all over the place, for decades

Step 2) Central Planners lie down on bed

Step 3) Bed is so thick and deep it begins avalanching and, eventually, catching fire

Step 4) Years later, Central Planners wake to smell of smoke and realise they have no good options due to step 1

Oopsey Doopsey

Up
0

Climate Change Policy = inflation above 2%

High inflation is not going away anytime soon. We are stuck with it.

 

Up
2

I am on 2.39% now and struggling with ill health , cost of living and may need to go on a benefit, I am a self employed ubereats driver, my income is less than $25,000 a year, my debt $200,000

My fixed term runs out in march 2023, should I break now and fix now, in your opinion.

 

I don't want to lose my home next year, but struggling to cover costs already.

Up
0

If you go on a benefit, I believe that there are top up payments available to help with the mortgage.   Not sure if the rules have changed, you could check with winz.    Being self employed, you could possibly drop your hours below the benefit threshold, and get a benefit with a small top up from a few hours per week doing Uber eats.

Lots of jobs around at the moment.   Perhaps you could increase your income?   Or get a boarder?

Don't believe ANYONE who says they know for sure where interest rates are going.     

Hundreds of thousands of people just made incorrect predictions about interest rates.  People get this stuff wrong All The Time.

....having said that, I personally would break and fix for a longer term  if I could afford it.   Just for peace of mind.    At least your mortgage is small (by today's standards).

 

Up
4

Speak to WINZ before doing anything.  You need to know what your benefit income + supplements would be in a worse-case scenario (i.e., if you have to leave work for health reasons).  Then work out what level of mortgage repayments you can afford.  If you have a good loan-to-value ratio, it will be in your bank's best interest to keep you in your home. For example, they might offer an interest free loan in the short term to reduce your outgoings for a period.

 

Up
1

Yes 100% agree with the strategy, but low LVR loans are easy meat for banks to maybe not help as they are well protected by the owners' equity, ie the banks can force the sale, easily clear their debt, and get rid of a nonperforming loan in one go. 

However, if there is any chance that in selling they might also lose, then they might be more inclined to help (themselves).

Always remember, these institutions are not your friends. The fact you may like what they do for you is a happy coincidence.

Up
1

Thank you for the replies its much appreciated

Up
2