Reserve Bank’s Survey of Inflation Expectations heads in the right direction

Business leaders and forecasters believe Reserve Bank Governor Adrian Orr will let inflation run a little hotter than he suggested in August. Photo / Mark Mitchell

Business leaders and forecasters see inflation abating slowly, without high interest rates crashing the economy in the process.

Nonetheless, they don’t see inflation getting back in its box as quickly as the Reserve Bank (RBNZ) expects.

Thirty-seven business leaders and professional forecasters were surveyed between October 18 and 26 (shortly after the general election) as a part of the RBNZ’s quarterly Business Survey of Expectations.

On average, they saw the annual inflation rate falling to 3.6 per cent in a year’s time, from 5.6 per cent in the September 2023 quarter.

This was an improvement from when they were last surveyed in July, suggesting they believed the RBNZ’s efforts to cool inflation by keeping the official cash rate (OCR) elevated was working.

However, the RBNZ, when it last published its economic forecasts in August, saw the annual inflation rate falling to 2.7 per cent by the September quarter next year.

So, while the RBNZ saw inflation retreating back to its 1 to 3 per cent target range by September 2024, survey respondents thought it would be higher, at 3.6 per cent, by around this time.

In fact, they only envisaged annual inflation falling to 2.76 per cent in two years’ time and 2.43 per cent in five years’ time.

Survey respondents saw economic growth holding up, the housing market warming, and wage growth slowing - but remaining relatively high - over the next year.

On average, they saw annual gross domestic product (GDP) growth hitting 1.26 per cent in a year’s time and 2.15 per cent in two years’ time. While growth was expected to be soft, respondents saw it being even more subdued when surveyed in July.

It was the same story when it came to house prices. Respondents saw annual house price growth hitting 4.84 per cent in a year’s time (up from 1.42 per cent when they were surveyed in July), and 6.22 per cent in two years’ time.

The change in sentiment followed a victorious election night for National, which campaigned on cutting taxes targeting residential property investors, and welcoming some foreign buyers back into the market.

As for annual wage growth – a driver of consumer inflation – business leaders and forecasters saw this slowing to 4.43 per cent in a year’s time, and 3.53 per cent in two years’ time.

What does this mean for interest rate?

Respondents generally agreed the OCR would remain at 5.5 per cent this year.

But they were divided on where it would land in a year’s time. On average, they saw it falling to 4.99 per cent.

The RBNZ, back in August, suggested the OCR could rise to around 5.6 per cent by September next year.

The variance suggests business leaders and forecasters believe the RBNZ will let inflation run hotter than what it’s signalling to deliver a “soft landing”.

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.