A survey the Reserve Bank pays close attention to has shown a fairly substantial drop in the expected level of inflation in two years time - a drop possibly sufficient to encourage the RBNZ to make a smaller hike to the Official Cash Rate than it had intended next week.
The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, will carry weight with the central bank in making its next decision on the Official Cash Rate on February 22.
At the moment the OCR is at 4.25%. Earlier the expectation had been that next week the RBNZ would hike to 5%. But these survey results coming on top of some weaker than expected economic data releases recently, might be enough to convince the central bank to 'just' raise the OCR to 4.75%.
The key result in the survey is that the expectation for inflation in two years' time - the most watched measure in the survey - has dropped to 3.3% from 3.62% three month ago.
After the two-year expectation spiked hugely in the previous survey this latest result will be heartening for the RBNZ in its battle to get inflation back into the 1% to 3% range.
But of course, heartening as the result may be, it means expectations are that the inflation rate will still be outside of the target range in early 2025 - while the RBNZ itself is forecasting it will get inflation back under 3% by September 2024.
Looking further forward the survey shows the expectation in five years time is that inflation will be on 2.36%. That's down also, from 2.44% in the last survey.
In terms of 10 years out, the expectation has risen slightly from 2.18% to 2.19% - but since that's quite 'well anchored' toward the midpoint of the RBNZ's targeted range it won't be any cause for concern. It's the two-year expectation that is watched closely.
Westpac senior economist Satish Ranchhod said the RBNZ "will likely have breathed a sigh of relief" and the survey release will "help to calm the RBNZ’s nerves about the upside risks for inflation".
"We’re still left with a very strong outlook for inflation over the coming year. However, inflation pressures are looking less alarming than they did back in November when the RBNZ delivered a jumbo-sized 75bp hike in the OCR and signalled that there was more to come.
"Consequently, it looks like the extent of OCR increases required to rein in inflation doesn’t need to be as large as the central bank previously anticipated. We continue to expect a 50bp rise at next week’s RBNZ policy meeting," Ranchhod said.
The data for the latest RBNZ survey was obtained from 39 business leaders and professional forecasters by the Nielsen group on behalf of RBNZ. Field work for the survey was run between January 26 and February 1, 2023.
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.
But since the last survey results came out in early November there's been key December quarter data released including inflation figures and labour market figures that were more benign - from a future inflation perspective - than anticipated. This broke a recent pattern of economic data releases constantly coming in much hotter than forecasts.
The key thing about this survey, particularly in relation to the inflation expectations, is not whether the expectations will prove to be 'right' or not in future. I'm prepared to wager now that they won't. It's all about gauging what the current expectations are - because if people expect higher inflation in future this will actually drive prices and wages higher. It is self-perpetuating.
That's why killing inflation expectations is a key part of the RBNZ's inflation fighting job.
The RBNZ will see the latest survey as a step in the right direction - but with much more to do.
Separately, the survey also included the views of respondents on where they see the REINZ House Price Index in one years' time and two years out. In short the view about the next year is more pessimistic than in the last survey, but the view for two years time is a little brighter.
The RBNZ said one-year-ahead expectations for house price changes were "widely varied".
Compared with last quarter, house price expectations for one-year ahead had a mean of -6.27%, down 88 basis points from -5.39%.
"It is the lowest recorded expectation of one-year-ahead house prices since this question was introduced [into the survey] in September 2017," the RBNZ said.
However, the mean two-year-ahead house price change was higher at 2.35%, "which is 12 basis-points higher than last quarter’s mean estimate of a 2.22% increase", the RBNZ said.
48 Comments
Container rates have dropped to pre pandemic levels, China is starting to trade again, the dollar is strong and European gas prices have fallen 40% from peak. Global inflation is cooling and this should filter through to NZ. The cyclone will push up local food prices due to scarcity but I doubt raising interest rates would stop this. Lower interest rates would help with repair costs. I can’t see a justification for further rate hikes.
If they give in to pressure now and dont raise the OCR sufficiently. It will just mean highet faster raises later. And more pain.
They will probably follow the narrative of the fed, say inflation is persistant and raise 75bps. Personally i reckon this will need to happen at least 2 to 4 more times to get a lid on it. The poor are already stopping spending... the middle class will need a good kick in the wallet (job losses) if they are to lessen spending enough to compensate for the elite (who will keep spending no matter the ocr).
Our biggest issue us the lag between ocr hike and an effect on spend due to the majority fixed rate mortgages.. means we have to overshoot with the ocr. If the rbnz instisted everyone had a minimum of 50% of loans on variable rates then they would have way more control on the economy.
This storm will impact on the production of all manner of items and create financial pressure on many.
Govt assistance will be pumped out (it's already started), thereby giving purchasing power when there are fewer goods available.
Inflation is inevitable when you create demand without the accompanying increase in goods.
If Orr does not raise by enough, then inflation will rage ahead even more so.
Watch the pressure mount to not.
Agree. Could be looking at 100 points. Next quarter minimum wages up. Quarter after fuel subsidies coming of. All opportunities to increase prices again. We have some really smart people in government. Inflation going down in Europe, USA, UK and we flat or going higher will make Orr bit nervous i suspect.
Does no one else think this major, destructive storm might give the RBNZ room to pause?
https://i.stuff.co.nz/business/300806909/cyclone-gabrielle-could-cost-e…
It very much depends. Christchurch earthquake had a pretty big impact on unemployment and GDP because the Canterbury region is key to New Zealand's economy. After the initial event, the rebuild was very stimulatory - employment in construction went up something like 20% from memory. It had a positive impact on NZ's GDP and employment stats (broken window fallacy, but we don't measure opportunity cost in GDP so whatever). Now consider Upper North Island and Gisborne - without wanting to sound callous, they are not nearly at the same level of importance to our economy as Christchurch. We might see a small impact on unemployment and GDP from the cyclone, but the rebuild will be stimulatory regardless of which region it is in.
The numbers affected by this may be much smaller than ChCh, but will still be significant. We aren’t just talking about households, but also many businesses. Including quite a lot of horticulture and viticulture.
I take your point, and I agree the rebuild will be stimulatory, but there’s a sharp short term impact here.
I am not saying they won’t hike, but I think there’s a much bigger chance it will be 25 BPs than it would have otherwise been.
I asked this about Auckland but didn't really get an answer. Is there any modelling to net how stimulatory a rebuild will be vs the loss of economic activity resulting from the disaster itself?
I think there may be a short term bump in food costs because upper north island is where a lot of stuff grows.
nktokyo, a natural disaster is hugely stimulatory. There are very few losers from such a disaster (financially speaking)*. 90% of losses are covered by insurance payouts. This huge money $ over a billion?, flows through construction, cars dealers, furniture shops, restaurants etc… Watch a second bout of inflation come in Q2-Q3, as a result of the extra money pumped into the economy
* Yes, I know I'm going to get lambasted for this sentence, but too bad, it remains absolutely true!
It would be a very bad mistake for the RB to pause hiking the OCR because of the natural disasters. These disasters are very inflationary, because there are $billions of insurance payout pumped into the economy. Also contributing to inflation are destroyed crops, leading to less food, which of course, means higher food prices.
The clear outcome of January's Auckland floods and yesterdays cyclone, is that the OCR is going to have to be raised further than expected.
Biden has just named Lael Brainard as his economic advisor.Brainard is on the board of Govs for the Fed Reserve.
Why is this relevant to inflation? Brainard is an MMT advocate and we all know what means as it relates to firing up QE. It could mean that inflation is on its way down in a serious way and the printing presses need to be prepared for action.
https://www.bloomberg.com/news/articles/2023-02-14/biden-will-name-fed-…
In the RB's survey released today expecs of GDP growth for the following 2 yrs are now lower than at any time except (a) the depths of the 08/09 recession, & (b) the first Covid lockdown qtr. (Survey results aren't great forecasters, but they do tell something about current mood) Link
We have a major natural disaster that has wiped out many houses and businesses, yet people think interest rates should continue to be hiked aggressively.
I find this hard to stomach.
And before people rant on about the CPI - the RBNZ has a broad mandate and a significant degree of discretion.
Further, and as has been discussed here many times, OCR hikes have a big lag effect. The current OCR level will have a big impact as many people renew mortgages this year.
Ok let me reframe things - you don’t think demand will be sucked out of the economy as most people refinance their mortgages at circa 6.5% over 2023?
Two further points:
- there are limits to the ability of interest rate increases to tame inflation. As JFoe has eloquently stated, rising interest rates actually have an inflationary as well as deflationary influence (although the net effect is certainly deflationary, but it’s more finely balanced than most imagine)
- Regardless of the storm, there was a good argument to suggest the current OCR setting is high enough to tame inflation, taking in to account the lag effect. There is every chance that a further 1-2% of hiking will have limited additional impact on inflation, yet destroy much of the economy
"most people" refinancing their mortgages are outnumbered over 2:1 by people who don't have mortgages.
People who cannot afford ever-increasing food (a necessity) don't care if others cannot afford their over-priced mortgages (in this bubble, a luxury).
If people hadn't overpaid for their property, for FOMO, getting ahead, CG, etc., the increasing interest rates would have a negligible effect on them.
In fact, since 2/3s of mortgages are less than half the value of rent, that suggests most mortgages won't be particularly hit very hard yet either - indicating rates need to increase substantially more if the RBNZ wants to effect more that the small minority that are over-leveraged.
Though I probably tend to underestimate the impact the industries leeching off the vapour gains have on the NZ economy.
I have no idea what you are talking about. This is nothing to do with the ‘problem being washed away’.
The current OCR will start biting this year and demand will be sucked out of the economy. Inflation will subside, it just needs time.
Meanwhile, NZ has been hit by a major natural disaster. Many households and businesses will be put under significant financial pressure.
I am not advocating for cuts to the OCR. Rather a pause and ‘wait and see’.
But I am obviously banging my head against a brick wall. Most commenters obviously want to see the NZ economy decimated, and more especially as much of a housing crash as possible. 30%? 40%?
The RBNZ mandate shouldn't be broader than its inflation and financial stability objectives. The RBNZ can't be tasked with "making peoples lives easier during a disaster". That role (if required) should be provided by government.
The idea that monetary stimulus can solve all problems is what got us into the inflationary mess in the first place.
I don’t necessarily disagree, however:
- Right now, the mandates are what they are
- given that, the OCR was cut massively on the ‘potential threat’ of a covid induced recession
- the OCR is high enough now to induce a recession, suck demand out of the economy and tame inflation. We just need time, as it lags
- given all of the above, don’t hike the OCR further (I am not advocating for cuts)
There is nothing in the RBNZs current mandate that says they need to “support the economy”. The closest thing would be the “maximum sustainable employment” mandate. And right now the RBNZ have stated they believe employment is actually ABOVE the sustainable rate.
There is no justification within their current mandate to justify lowering the ocr to “support” the economy, or support flood victims.
...expectations are that the inflation rate will still be outside of the target range in early 2025 - while the RBNZ itself is forecasting it will get inflation back under 3% by September 2024.
Neither is prospect is enticing. We will need a very long period of low/no inflation to allow wages to catch up.
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