RBNZ faces fresh inflation pressure before rate decision
The Reserve Bank of New Zealand (RBNZ) faces fresh pressure ahead of its May 28 official cash rate decision, following the release of the first official results from its new Tara-ā-Umanga Business Expectations Survey.
The data showed inflation expectations rising across all timeframes — an outcome RBNZ will be reluctant to see.
While the economy is beginning to respond to lower interest rates, the recovery remains slow and uneven — and rising inflation expectations may complicate the case for further cuts.
New survey reveals inflation expectations rising across all horizons
According to the RBNZ, the survey revealed that Kiwi businesses now expect inflation to rise in the year ahead and beyond, interest.co.nz reported.
“Overall, businesses’ expectations for annual CPI inflation increased across all time horizons,” the central bank said.
- One-year-ahead inflation expectations rose 19 basis points to 2.44%
- Two-year-ahead expectations — closely watched by the RBNZ — rose 7 basis points to 2.54%
- Five-year and 10-year expectations jumped to 3.06% and 3.94%, respectively
While the two-year measure remains inside the RBNZ’s 1-3% target range, all measures moved upward — a result at odds with the central bank’s inflation-fighting goals.
“Expectations drive inflation”: RBNZ explains survey significance
RBNZ has invested significant time developing the new survey to strengthen its monetary policy toolkit.
“Tara-ā-Umanga Business Expectations Survey is a representative sample survey of New Zealand businesses,” it said. “The survey enhances our understanding of inflation and other macroeconomic expectations, to inform policy making and support research.”
The central bank reiterated the importance of anchoring inflation expectations.
“Inflation expectations are important because households and businesses reflect their expectations in their price- and wage-setting decisions,” RBNZ said. “Improving the quality of our expectation surveys is part of the wider response to our 2022 review of how we formulate and implement our monetary policy.”
Large sample gives survey weight as policy tool
The inaugural official results were gathered by Research New Zealand from 636 businesses across diverse sectors. Fieldwork began on April 22, shortly after Stats NZ’s March CPI showed inflation climbing to 2.5%, up from 2.2% in the December 2024 quarter.
RBNZ noted that pilot survey data was also included for comparison purposes, helping to establish trend baselines.
Market expects May rate cut, but outlook now cloudier
Markets broadly expect RBNZ to cut the OCR next week from 3.5% to 3.25%, but the uptick in inflation expectations may complicate future decisions. The central bank has long warned that rising expectations can become self-fulfilling.
According to interest.co.nz, RBNZ will no doubt be concerned that inflation expectations increased across all time horizons in the survey, moving contrary to its policy goals.
The RBNZ’s Q2 2025 Survey of Expectations also showed a broad rise in inflation expectations, with the two-year measure posting its largest increase in over two years. While expectations remain within the 1–3% target band, economists said further increases could pressure the central bank to pare back its easing cycle.
Some forecasters had projected the OCR could fall as low as 2.5% by the end of 2025, but persistent upward movement in inflation expectations could temper those calls.
