Economists see the Reserve Bank being wary on inflation and taking a cautious approach to further interest rate cuts next year

Economists see the Reserve Bank (RBNZ) as being wary on continued inflation risks and taking a more cautious view of interest rate cuts next year.

The latest quarterly RBNZ Survey of Expectations released this week showed that while survey respondents saw future inflation somewhere around the RBNZ's explicitly targeted 2% level, there had nevertheless been a bit of a rise in expectations.

And this survey was conducted after the release of September quarter Consumer Price Index (CPI) data that showed annual inflation dropping to just 2.2% - but before the US election, the results of which are seen as potentially having some ramifications for global inflation.

ASB senior economist Mark Smith noted that in the survey inflation expectations for all time horizons [and these include one year, two years, five years and 10 years] remain close to 2% despite respondents significantly revising up expectations for NZ monetary policy easing.

ASB economists still expect a 50 basis point cut to the Official Cash Rate (OCR) at the next review on November 27. The RBNZ started to cut the OCR in August, reducing it so far from 5.5% to 4.75%. Another 50 bps cut therefore would see the OCR end 2024 on 4.25%.

"However, the RBNZ would not want to see continued climbs in expected inflation readings above 2%. This would slow the amount of monetary easing in 2025 and beyond," Smith said.

"They will be somewhat wary given recent developments and what this means for global inflation.

"A less benign global inflation backdrop will certainly make the RBNZ’s job of maintaining 2% NZ inflation more difficult. We still expect a 50bp OCR cut in November but view 2025 settings to be conditional on the inflation and wider economic outlook."

Westpac senior economist Satish Ranchhod also noted that the RBNZ survey had shown inflation expectations looking well contained

But even so, the survey "highlights that the risks for inflation are not all in one direction".

He said while inflation has fallen sharply over the past year (especially in relation to import prices), domestically we are still seeing strong increases in some costs such as local council rates and insurance charges.

"Those continued cost increases are limiting the decline in overall inflation. And with related risks for inflation expectations, such costs warrant continued close attention as we head into the new year.

"We expect that the RBNZ will adopt a more gradual and data dependent approach to policy changes next year."