Economists: RBNZ will be heartened as survey shows inflation expectations continue to fall

If businesses expect inflation to remain high, they are more likely to try and push through larger increases in prices. Photo / Mark Mitchell

Economists believe the Reserve Bank (RBNZ) will be heartened by new survey results that show business leaders and professional forecasters continue to see inflation tracking down.

On average, the 38 people surveyed as a part of the RBNZ’s quarterly Survey of Expectations saw the annual inflation rate falling to 3.22 per cent (from 4.7 per cent) by this time next year and 2.5 per cent by early 2026.

The RBNZ, in its latest set of economic forecasts released in late November, saw inflation falling faster. Indeed, if the survey respondents are right, and the inflation rate falls to 3.22 per cent by early next year, it would’ve been outside the RBNZ’s 1 to 3 per cent target range for nearly four years.

ANZ chief economist Sharon Zollner believed the RBNZ might’ve hoped for one-year ahead inflation expectations to have fallen more. Nonetheless, it would be reassured respondents’ longer-term inflation outlooks fell from when they were last surveyed.

While the RBNZ in November suggested it could hike the official cash rate (OCR) one more time this year, before cutting it in 2025, survey respondents saw the RBNZ cutting the rate from 5.5 per cent to an average of 4.74 per cent by this time next year.

Westpac senior economist Satish Ranchhod explained, “The RBNZ has been concerned that domestic inflation pressures remain ‘sticky,’ and expectations are a key part of that story – if businesses expect inflation to remain high, they are more likely to try and push through larger increases in prices. That will also affect wage setting.

“However, today’s survey showed that expectations are continuing to drop, and they are moving closer and closer to the RBNZ’s target…

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

Looking at other parts of the survey, the respondents appeared worried about economic growth prospects in New Zealand.

On average, they saw annual gross domestic product (GDP) growth coming in at 1.26 per cent in a year’s time.

In two years, they saw the annual rate improving to a sluggish 1.88 per cent. Respondents were slightly more downbeat on the economic outlook than when they were surveyed in October.

Accordingly, they saw the unemployment rate rising by more than they previously anticipated.

Respondents saw the unemployment rate rising to 4.64 per cent in a year’s time and 4.69 per cent in two years’ time.

As for house prices, respondents saw these rising by an average of 4.82 per cent over the year, before picking up to 5.78 per cent during the following year.

The New Zealand dollar fell after the survey results were published on Tuesday afternoon from 61.3 to 61.0 US cents.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.