Inflation expectations fall as economic growth also tipped to stay in the doldrums

ASB economist believes increased consumer resistance to paying higher prices will help dampen inflation. Photo / File

Economic forecasters and business leaders are increasingly confident the inflation fight is being won – albeit at a cost.

Those surveyed between April 18 and 26 as a part of the Reserve Bank’s (RBNZ) quarterly Survey of Expectations saw the annual inflation rate falling to 2.73 per cent in a year’s time, and 2.33 per cent in two years’ time.

When respondents were surveyed three months earlier, they saw the rate falling to 3.22 per cent in a year’s time and 2.50 per cent in two years’ time.

ASB senior economist Kim Mundy believed the RBNZ would be pleased to see inflation expectations drift lower to levels more consistent with its 1 to 3 per cent target range.

However, neither Mundy nor Westpac senior economist Satish Ranchhod believed the improvement in expectations would give the RBNZ the confidence required for it to cut the official cash rate (OCR) before early next year.

“While today’s fall in inflation expectations will help to quell concerns about the persistence of domestic inflation, we still think that inflation will fall more gradually than the RBNZ has assumed,” Ranchhod said.

The RBNZ is interested in what people expect will happen to inflation, as this influences how businesses set prices and pay their employees, for example.

The annual inflation rate fell to 4 per cent in the March quarter from a peak of 7.3 per cent in the June 2022 quarter. Concerningly, largely domestically driven non-tradeable inflation came in at 5.8 per cent.

On average, the 37 respondents to the RBNZ’s survey saw the OCR falling to 4.79 per cent by the end of March.

They believed keeping the OCR high would see the economy grow at a very sluggish rate of 0.98 per cent over the next year, before inching up to only 2.01 per cent the following year.

Respondents were more pessimistic about near-term growth prospects than when they were surveyed three months earlier.

Accordingly, their expectations for house prices deteriorated, as they saw house prices rising by an average of 3.43 per cent over the next year, and 4.74 per cent over the following year.

Respondents were also more downbeat on the labour market than they were three months earlier.

They saw the unemployment rate rising to 4.90 per cent in a year’s time and 4.79 per cent in two years’ time.

The New Zealand dollar fell against the US dollar after the RBNZ released the survey results on Monday afternoon.

Mundy noted the small number of businesspeople who took part in the survey were more confident about inflation falling than the 1000 or so consumers who responded to the RBNZ’s Household Expectations Survey.

“The household sector is under significant pressure given cost-of-living headwinds,” she said.

“We expect to start to see increased consumer resistance to paying higher prices as a key factor that should help check inflationary pressures in time.”

The RBNZ will next review the OCR and issue a Monetary Policy Statement on May 22 – a week before the Government releases the Budget.

Jenee 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.