The latest quarterly Survey of Expectations reveals inflation is projected to be 2.06% in two years, a slight decline from the previous 2.12% forecast. This aligns with the RBNZ’s inflation target of between 1% and 3%, with a preferred midpoint of 2%.
Inflation expectations play a critical role in shaping actual inflation as businesses and consumers adjust pricing and spending based on the future outlook. The latest survey suggests that public perception is now well-anchored around the RBNZ’s preferred level. This positive development will help maintain economic stability.
As of the December quarter, the annual inflation rate measured by the Consumers Price Index (CPI) stood at 2.2%. While the one-year inflation expectation saw a slight rise to 2.15% from 2.05%, this was largely anticipated due to temporary factors like rising fuel costs and the weaker New Zealand dollar. However, the longer-term inflation outlook remains stable with the five-year expectation dropping to 2.13% from 2.24%. The 10-year expectation has declined to 2.07% from 2.19%.
Despite fluctuations in the shorter term, Westpac economists believe the RBNZ will remain confident that pricing behaviour aligns with its medium-term objectives. Given the shifting global trade environment and currency movements, this stability offers a degree of economic certainty.
Westpac anticipates the RBNZ will implement a 50-basis-point cut to the OCR at its upcoming meeting, bringing it down to 3.75%. Further cuts are expected in April and May, albeit slowly. A 25-basis-point reduction has been forecast. These measures aim to support economic growth while maintaining inflation within the target range.
The survey, conducted by Research New Zealand – Rangahau Aotearoa, gathered responses from 42 business leaders and professional forecasters. The sample size represents an increase compared to previous surveys, reinforcing the credibility of the findings.
The survey results also highlighted shifting expectations on employment and wages. The one-year-ahead unemployment rate forecast dropped from 5.22% to 5.08%, while the two-year forecast fell from 4.86% to 4.69%. Wage growth expectations also declined. The one-year forecast fell from 2.81% to 2.49% the lowest level since March 2021.
Conversely, expectations for house price growth increased. The one-year-ahead forecast for annual house price inflation climbed to 3.85%, up from 3.04% last quarter. The two-year forecast also saw an uptick, rising from 4.17% to 4.56%.
Overall, the latest survey results suggest that inflation expectations are stabilising, providing the RBNZ with confidence in its policy approach.
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