Markets still pricing in May rate cut despite "Trump bump" in inflation forecasts
New Zealand inflation expectations rose across all key horizons in the Reserve Bank’s Q2 2025 Survey of Expectations— but remained comfortably within the 1–3% target range.
Despite the upward shift, economists said the figures are not yet alarming and RBNZ is still expected to cut the official cash rate (OCR) later this month.
“We still expect a 25bp OCR cut later this month and a 2.75% OCR endpoint, but this is conditional on the expected mid-2025 lift in inflation proving to be transitory,” said Mark Smith (pictured left), ASB senior economist. “The risk is that concerns over inflation see the RBNZ pare back monetary policy easing.”
Smith warned that further rises in inflation expectations would add pressure to the central bank as it works to restore pre-COVID norms of low and stable inflation.
“Trends in inflation expectations will be crucial for assessing future monetary policy decisions,” he said. “Further climbs would be unhelpful for a central bank trying to re-establish pre-COVID norms of low and stable inflation.”
Two-year inflation expectations post biggest rise in 2.5 years
One- and two-year inflation expectations rose notably, reflecting higher cost concerns in sectors like food, energy, and transport.
- One-year expectations: 2.41% (up from 2.15%)
- Two-year expectations: 2.29% (up from 2.06%)
- Five-year expectations: 2.18%
- Ten-year expectations: 2.15%
ASB noted that the 0.23 percentage point jump in the two-year measure was the largest in two and a half years. While the numbers remain inside the target band, the shift was significant.
“Even so, [the] data is a timely reminder of the lingering upside risks for inflation,” said Westpac senior economist Satish Ranchhod (pictured right). “The rise in the usually stable two-year ahead measure was large compared to history.”
RBNZ comforted, but cautious, by anchored long-term expectations
Longer-term inflation expectations remain near 2%, which analysts say supports confidence in the RBNZ’s inflation targeting credibility.
“The level of inflation expectations remains well within the 1% to 3% target band,” Ranchhod said. “Expectations for longer-term inflation – i.e. over 5-10 years… remain close to 2%.”
He added that recent firm price pressures — including a spike in electricity, transport, and even coffee prices — underline the upside risks.
“Those lingering inflation pressures will be an important balancing factor for the RBNZ when considering how to respond to the increasingly rocky global backdrop,” Ranchhod said.
Outlook: OCR cuts still on track, but inflation path crucial
Despite the jump in expectations, both ASB and Westpac still anticipate a 25bp cut at the RBNZ’s May 28 meeting, with potential for further measured easing depending on how inflation evolves.
“We’re forecasting that inflation will rise to 2.8% by the end of this year,” said Ranchhod, “with inflation to linger in the upper part of the target band for some time.”
ASB continues to expect an OCR trough of 2.75% by year-end, but Smith reiterated that this outlook is highly conditional.
“Monetary policy settings remain highly conditional on the inflation and wider economic outlook,” he said.
New survey tools to improve inflation insight
This quarter’s expectations survey was based on just 41 responses, largely from market professionals rather than price-setters. The limited sample size calls for cautious interpretation.
RBNZ is expanding its inflation monitoring tools to better capture broader sentiment. Two upcoming reports include:
- Business Inflation Expectations Survey (out next week), canvassing ~400 firms
- Tara-ā-Whare Household Expectations Survey (due 23 May), covering ~1,000 households
Smith welcomed these additions.
“The RBNZ is bolstering its efforts in understanding the expectations process… both timely and welcome,” he said.
