The "worryingly high" expectations are "certainly not consistent with strong inflation dissipating any time soon," economists say
In ANZ’s NZ Weekly Data Wrap, the bank’s economists said stubbornly high inflation expectations are highlighting the challenges facing the Reserve Bank in putting inflation under control.
ANZ economists reiterated that there are “upside risks” to their OCR peak forecast of 5%, despite downside risks to economic growth continuing to build. Currently sitting on 3.5%, the OCR is widely expected to see another sizable hike on Nov. 23, with ANZ economists expecting it to increase by 75 basis points.
The ANZ economists said RBNZ’s latest quarterly Survey of Expectations, released last week, reinforced the upside risks, interest.com.au reported.
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“It was all bad news, with inflation expectations rising across the curve, despite survey respondents also anticipating a much higher peak in the OCR,” the economists said. “Essentially, inflation was seen as being much stronger and more persistent, even in the face of the rapid rate rises the RBNZ has delivered.”
They said the survey of just 33 “business leaders and professional forecasters” did not capture the expectations of Kiwi businesses and households at large.
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“But it does highlight that forecaster expectations are moving further towards the ‘RBNZ losing credibility’ end of the spectrum, which would support super-sized 75bp OCR hikes in the next two meetings as the RBNZ defends its inflation target,” the ANZ economists said.
According to them, the latest Survey of Expectations “joins an array” of broader measures of inflation expectations that have continued to be “worryingly high” in recent months and were “certainly not consistent with strong inflation dissipating any time soon.”
“For example, in the October ANZ-Roy Morgan Consumer Confidence survey inflation expectations were little changed at 5.0% (5.1% previously),” the economists said. “That’s down from peaks seen earlier in 2021 but remains well above pre-pandemic ranges of 3-4%. In our ANZ Business Outlook survey, inflation expectations bounced to 6.1% in October (6.0% previously), remaining close to their recent highs. Cost expectations and pricing intentions have eased modestly from extreme highs, but again are still far too strong to be consistent with low and stable inflation being achieved in the near term.
“Stubbornly high inflation expectations across a number of different surveys highlight the challenge that remains for the RBNZ. Yes, they have delivered significant monetary tightening in a very short period of time, and yes, that’s going to slow down the economy over 2023. But with expectations of high inflation becoming embedded into wage and price setting behaviour, it’ll take a concerted effort to tamp down wage-price spiral dynamics that are becoming ever more established in the New Zealand economy.”
With recession risks rising, but when price stability was at stake, the ANZ economists said “getting inflation back down is priority number one.”
In Westpac's latest Weekly Economic Commentary, Satish Ranchhod, Westpac senior economist, said heightened inflationary expectations are “a big worry for the RBNZ.”
“Expectations, especially over longer horizons, are a key influence on how businesses adjust prices and wages,” Ranchhod said. “Their recent rise signals that the current inflation cycle could be even more protracted.”
The Westpac economists expect the OCR to increase by 75 basis points on Nov. 23, with further hikes to come next year.
“One of the major complications in the RBNZ’s fight against inflation is the prevalence of mortgage rate fixing,” Ranchhod said. “Around 90% of New Zealand mortgages are on fixed rates, and many of those are still locked in at the very low interest rates that were on offer in the early stages of the pandemic. That’s meant large numbers of households are yet to feel the impact of rate hikes to date, which has allowed them to maintain their spending patterns.
“That picture will change dramatically over the coming months, with more than half of all mortgages coming up for repricing over the next 12 months. In many cases borrowers will face refixing at rates that are 3 percentage points higher than those they are currently on. And as that occurs, we’re certain to see a slowing in domestic demand.”
But while Kiwis are waiting for the full impact of the OCR hikes to kick in, Ranchhod said RBNZ would have a tough time balancing this out with “sizzling” inflation pressures.
“Taking a more gradual approach and waiting to see the full impact of rate hikes could actually mean more pain in the longer term if inflation pressures do not ease off,” Ranchhod said. “In contrast, more aggressive rate hikes now could risk a sharper than necessary downturn in economic activity and employment.”
He said ANZ expects the RBNZ, ultimately, to maintain its “stitch in time” approach.
“That means the central bank is likely to continue to front load its policy tightening,” Ranchhod said. “And on balance, we think that is the right approach, especially given the clear upside risks for inflation expectations. Indeed, if the RBNZ doesn’t get in front of those pressures soon, the New Zealand economy could realistically find itself mired in a wage-price spiral. That would impose serious harm on households and the economy more generally, with ongoing pressure on living costs and weakness in economic activity.”
