Influential RBNZ survey shows a decisive drop in the expectation of future levels of inflation in a result that will give the RBNZ comfort ahead of its next Official Cash Rate decision

A survey the Reserve Bank (RBNZ) pays close attention to has shown a decisive drop in the expected levels of future inflation.

The results of the latest Survey of Expectations, carried out quarterly for the RBNZ, will give significant comfort to the central bank ahead of making its next decision on the Official Cash Rate on Wednesday, February 28.

According to the key survey results, expectations for annual inflation one year ahead decreased 38 basis points from 3.60% to 3.22%, which is the lowest level since September 2021.

Two-year-ahead inflation expectations decreased from 2.76% to 2.50%.

The five-year-ahead and 10-year-ahead inflation expectations also declined to 2.25% (from 2.43%) and 2.16% (from 2.28%), respectively.

These are very decisive drops in inflation expectations and indicate renewed confidence that the RBNZ's efforts to rein in inflation are working.

Remember, the RBNZ targets achieving inflation within 1% to 3%, with a specific aim of 2%.

ASB senior economist Mark Smith said the survey results showed that monetary policy is working "and suggests the next move in the OCR will be a cut".

"The hurdle to OCR moves in either direction remains high, but we are confident that the RBNZ has done enough monetary tightening. We expect OCR cuts to begin from the second half of 2024, but for the RBNZ to talk tough in the interim to ensure low inflation is locked in."

Westpac senior economist Satish Ranchhod said "conditions are moving in the right direction".

"Inflation and inflation expectations are dropping back, and both economic activity and the labour market are cooling. Those conditions mean that, while the RBNZ won’t be easing their foot off the brake just yet, they are likely to feel comfortable that policy settings are tight enough to get inflation back to target.

"We continue to expect the RBNZ will leave the OCR on hold this year, and are not forecasting cuts until early 2025," Ranchhod said.

The Kiwi dollar dropped by more than a quarter of a cent against the US currency (to under US61c) after the survey results were released - which is a sure sign the markets are interpreting the results as making another OCR hike less likely.

Respondents to the latest survey will have seen the latest Consumers Price Index figures released on January 24, which showed annual inflation easing nicely to 4.7% from 5.6%. Rather less comforting, however, was the fact that non-tradable (domestic) inflation dropped only to 5.9% from 6.3% - slower drop than the RBNZ expected.

This fact, plus some unexpectedly buoyant results from the latest labour market figures - with unemployment lower and wages rises higher than the RBNZ expected - and the heat has suddenly been on for that February 28 OCR decision.

Following last week's labour market release, ANZ economists changed their call, picking an OCR hike at the end of the month, and a peak OCR ultimately of 6.0% against 5.5% currently. After this, wholesale interest rate market pricing moved up rapidly and was briefly giving a 50-50 chance of a February hike, though by Tuesday this had subsided somewhat to be giving about a 30% chance of a hike this month.

But the results in this latest survey will perhaps carry quite a bit of sway with the RBNZ that a further hike in the OCR is not needed - at least at this stage.

The RBNZ said the data for this quarter was obtained from 38 business leaders and professional forecasters by Research New Zealand – Rangahau Aotearoa on behalf of RBNZ. Field work for the survey was run between the 25th and 31st January 2024.

Never say never with the RBNZ. But it does follow this survey closely. And based on these results an OCR hike this month would not appear necessary.

The message that inflation is falling IS getting through and that is starting to meaningfully reduce expectation of future inflation - which is the vital thing for the RBNZ to achieve.