This post was originally published on this site.
The split between Westpac and ASB matters more than the headline forecast itself, since it signals genuine uncertainty over how sticky the oil-driven inflation shock is proving in household and business psychology, precisely the dynamic the RBNZ is watching most closely as it tightens. A stronger-than-expected print, in line with Westpac’s call, would reinforce the case for the RBNZ to stay firmly on its 25 basis point hike path and would likely support the New Zealand dollar, including on the AUD/NZD cross, on expectations of a higher terminal OCR. A softer outcome closer to ASB’s base case would ease pressure on the central bank without necessarily closing the door on further hikes, given ASB’s own flagged upside risks. Either way, the medium to long-term expectation readings will carry outsized weight for how markets price the eventual OCR peak.
—
Two of New Zealand’s major banks are reading the same inflation backdrop and reaching opposite conclusions about where expectations are headed next.
Summary:
- The RBNZ’s Q3 Survey of Inflation Expectations is due Thursday, with the two-year-ahead measure last printing at around 2.5 percent
- Westpac expects another rise in the closely watched one and two-year-ahead expectations, citing large recent swings in oil prices and overall inflation climbing back to 4.1 percent
- Westpac sees longer-horizon expectations, at the five and ten-year marks, as more likely to stay stable given the RBNZ’s tightening cycle is already underway
- ASB expects a broadly easing set of readings, pointing to retail fuel prices well off their mid-April peak and softer signals from higher-frequency pricing and expectations surveys
- ASB nonetheless flags upside risk to the Q3 print from the elevated Q2 headline inflation figure, warning its own models suggest medium and longer-term expectations could drift higher
- ASB’s Q2 reference points were one-year expectations at 3.4 percent, two-year at around 2.5 percent, five-year at around 2.2 percent and ten-year at around 2.2 percent
- ASB expects the RBNZ to keep affirming its inflation credentials with steady 25 basis point hikes, taking the OCR to 3.25 percent by year end
- ASB notes the OCR could peak lower if spare capacity dampens wage and pricing pressure, or higher if inflation expectations decouple from the 1 to 3 percent target band
Two of New Zealand’s banks are offering starkly different previews of Thursday’s Reserve Bank of New Zealand Q3 Survey of Inflation Expectations, a release both Westpac and ASB agree will be closely watched by the central bank even as they disagree on what it will show. The survey’s two-year-ahead measure, the RBNZ’s preferred gauge of anchored expectations, last printed at around 2.5 percent, and how far it moves from there will shape near-term pricing of the tightening cycle.
Westpac expects the survey to show another increase in the closely watched one and two-year-ahead horizons, arguing that inflation expectations already stepped higher in the second quarter and that the backdrop since then has only reinforced the risk. The bank points to large swings in oil prices over the period and to headline inflation climbing back up to 4.1 percent as reasons households and businesses are likely to mark up their near-term price expectations further. Westpac’s central concern is less about the current inflation print itself than about the risk of a broader, more enduring shift in pricing behaviour taking hold, the kind of second-round effect central banks work hardest to prevent. The bank does expect longer-horizon expectations, at the five and ten-year marks, to hold comparatively steady, reasoning that the RBNZ’s tightening cycle already underway should help keep those further-out anchors in place even as near-term readings move.
ASB takes the opposite view on the headline direction, expecting the Q3 survey to show a broad easing in inflation expectations. The bank’s reasoning centres on retail fuel prices, which have retreated well off their mid-April peak, alongside encouraging signals from higher-frequency pricing intentions and expectations surveys that it expects to filter through into a softer official reading. However, ASB is not dismissing the risk that cuts the other way. The bank explicitly flags the possibility of upward drift stemming from the elevated second-quarter headline inflation print, and its own forecast models point to some upside risk in the Q3 readings, particularly at medium and longer horizons, if elevated headline inflation begins to feed into how far out households expect prices to keep rising. For reference, ASB’s second-quarter survey points came in at 3.4 percent for the one-year horizon, around 2.5 percent for two years, and around 2.2 percent at both the five and ten-year marks.
On policy, ASB expects the RBNZ to continue affirming its inflation-fighting credentials with a steady pace of 25 basis point hikes, taking the Official Cash Rate to 3.25 percent by year end. The bank frames that as a central case rather than a fixed outcome, noting the OCR could ultimately peak below that level if spare capacity in the economy dampens wage and price-setting pressure. Conversely, should inflation expectations decouple meaningfully from the RBNZ’s 1 to 3 percent target band, the risk skews toward a higher terminal rate than currently pencilled in. That two-sided framing leaves Thursday’s survey as a genuine swing factor for how far the RBNZ still has to go in this tightening cycle, rather than a formality ahead of an already-settled policy path.
—
The next RBNZ decision is due on September 2:
This article was written by Eamonn Sheridan at investinglive.com.
