Survey of inflation expectations to bring Reserve Bank ‘a bit of relief’

More bets are on a 50-point OCR hike, than a 75-point increase. Photo / NZME

Financial markets are placing greater bets on the Reserve Bank hiking the official cash rate (OCR) by 50 points, rather than 75, when it reviews monetary policy settings next Wednesday.

The movement comes as 39 business leaders and forecasters, asked to respond to the Reserve Bank’s Survey of Expectations between January 26 and February 1, saw inflation eventually falling.

On average, they saw the annual inflation rate dropping to 3.30 per cent in two years’ time, from 7.2 per cent in the December quarter.

This was an improvement from when they were last surveyed in November and saw inflation falling to 3.62 per cent in two years’ time.

Even if inflation fell to 3.30 per cent by 2025, it would still be outside the Reserve Bank’s 1 to 3 per cent target range. The inflation rate has been above this range since mid-2021.

Survey respondents’ one-year-ahead inflation expectation rose 3 points from the last survey to 5.11 per cent, meanwhile their five-year expectation fell 8 points to 2.36 per cent.

ANZ chief economist Sharon Zollner expected the results to bring “a bit of relief” to the Reserve Bank, as inflation expectations are going in the right direction.

There would’ve been cause for concern had this not happened, given the hawkishness of the Reserve Bank’s November Monetary Policy Statement.

On average, survey respondents expected the OCR to increase from 4.25 per cent to 4.89 per cent by the end of March, and 5 per cent by the December quarter.

The Reserve Bank, in November, expected the OCR to hit a peak of 5.5 per cent by the middle of the year.

Westpac senior economist Satish Ranchhod said the survey results, coupled with the fact inflation wasn’t as strong in the December quarter as the Reserve Bank expected, suggested it looked like the OCR wouldn’t need to be hiked as much as the central bank previously anticipated.

“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,” Ranchhod said.

“We continue to expect a 50-basis-point rise at next week’s Reserve Bank policy meeting.”

Indeed, Zollner said market pricing had shifted after the survey results were published on Tuesday afternoon. Meanwhile, the New Zealand dollar fell from US63.5c to US63.3c.

While the Reserve Bank pays the most attention to inflation expectations, respondents’ answers to other questions were also noteworthy.

On average, they expected one-year-ahead wage inflation to be 5.51 per cent - the highest value since the question was first asked in 1993.

They saw annual gross domestic product growth coming in at 0.79 per cent in a year, and 1.49 per cent the following year.

Respondents saw the unemployment rate lifting to 4.19 per cent in a year and 4.60 per cent in two years.

As for house prices, their views were particularly varied, but on average, they saw prices falling by 6.27 per cent in the next year - the greatest expected drop since the question started being asked in 2017.

Nonetheless, respondents saw annual house price growth recovering in two years’ time to a modest 2.35 per cent.