Inflation views steady, clearing path for rate cut
Inflation expectations remain well-contained despite recent headline inflation increases, giving the Reserve Bank (RBNZ) flexibility to continue its easing cycle, according to ASB’s latest analysis of the central bank’s Q3 Survey of Expectations.
“Despite annual CPI inflation ticking up to 2.7% in Q2 (and on track to hit 3% soon), inflation expectations from the RBNZ Survey of Expectations have remained parked well within the 2–2.5% Goldilocks Zone,” said ASB senior economist Mark Smith (pictured right).
ASB expects a 25-basis-point official cash rate (OCR) cut at the RBNZ’s August policy review, with inflation expectations offering room for further easing.
“Provided that inflation expectations remain anchored around the inflation target midpoint, the RBNZ would be well placed to push the OCR below 3% if there was the need to kick-start the sluggish NZ economy,” Smith said.
Survey reinforces May MPS guidance
The survey of 40 respondents was conducted between July 22 and 28, after the release of Q2 CPI data but before labour market data. It showed only a modest rise in longer-term inflation expectations:
- 1-year-ahead inflation expectations eased to 2.37% (from 2.41%)
- 2-year-ahead expectations were steady at 2.28%
- 5-year-ahead expectations rose slightly to 2.26%
- 10-year-ahead expectations held at 2.15%
“These contained readings suggest that the RBNZ will ‘look through’ the near-term spike in inflation and stick to its May MPS guidance,” Smith said.
ASB forecasts annual CPI to fall closer to 2.5% by early 2026, aligning with the RBNZ’s inflation target and supporting further cuts.
Labour, growth, and house price expectations stabilise
Expectations for house price growth remained modest despite easing interest rates, with one-year-ahead house price inflation at 2.87%, up from 2.78% in the previous quarter.
Unemployment expectations stabilised at 5.0% one year ahead and 4.6% over two years, while wage inflation expectations remained below 3% across all horizons.
“Wage inflation expectations have remained sub 3% (2.6% 1-year ahead, 2.9% 2-years ahead). Readings for both horizons are historically low and should help to cap core inflation,” Smith said.
Economic growth forecasts also edged higher but remained modest: 1.66% over one year and 2.16% over two.
Market pricing backs OCR cut
Survey participants expected a 3.02% OCR by the end of Q3 2025 (currently 3.25%), with further cuts anticipated: the one-year-ahead forecast sits at 2.86%.
ASB’s call for a 25bp August cut was echoed by Westpac senior economist Satish Ranchhod, who said in a LinkedIn post: “Expectations for inflation over the next few years held broadly steady... That’s a tick in favour of another OCR cut in August.”
He added that “with expectations remaining contained, the RBNZ will feel more comfortable that they can look through the near-term rise in inflation and continue cutting the OCR.”
Read the ASB commentary in full.
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