Inflation expectations down to 3-year low!

The Reserve Bank of New Zealand released its latest survey of inflation expectations among businesses. The Bank is likely pleased with the decline in one- and two-year ahead inflation expectations, especially the two-year measure near the midpoint of the 1% to 3% target band.

However, persistent stickiness in some other measures of inflation (e.g. transport, rates, and some food items in recent data) suggests that the Reserve Bank will still need to see further movement in real world pricing data before it feels its inflation battle is done. With this in mind, the first potential cut in the Official Cash Rate is expected in early 2025, with only a slight chance of a pre-Christmas cut if other data aligns.

Key points:

  • One-year-ahead mean inflation expectations dropped to 2.73% in Q2, the lowest in three years.
  • The RBNZ two-year-ahead measure eased to 2.33%, near the midpoint of the target band and its lowest since 2021 Q3.
  • Expectations on this horizon have remained below 3% for five consecutive quarters, indicating ongoing cautiousness.
  • The data highlights progress but given some lingering concerns about inflation in other datasets the Reserve Bank is likely to maintain its monetary policy tightness for the time being.