New Zealand Economic Comment "RBNZ preview: OCR on hold in May; but trac..."

Research evidence excerpt

New Zealand Economic Comment "RBNZ preview: OCR on hold in May; but trac..."

Inflation expectations suggest it will take longer to return headline CPI to 2%

The RBNZ conducts three surveys of inflation expectations, with measures covering

households, businesses, and professional forecasters, and spanning different time

horizons. The RBNZ also looks at so-called 'adaptive', or modelled, measures of inflation

expectations. These measures feed into the RBNZ's assessment of price-setting

behaviour, which is then used to provide an assessment of the persistence of inflation.

The upshot of both the higher Q1-26 headline CPI outturn and the recent higher reads

on short- and medium-term inflation expectations is that the RBNZ is likely to judge that

price-setting behaviour is adjusting down more slowly than they assumed in February,

and hence that inflation will be more persistent and take longer to return to the 2%

midpoint. Combined with the significant cumulative and sustained overshoot over

recent years vs the 2% midpoint target, the RBNZ will likely need to increase the OCR

earlier than previously expected.

Financial conditions have materially tightened even with the OCR on hold

MPC member Prasanna Gai delivered a speech recently, where he commented that if the

shock is such that the neutral rate is rising, then "a central bank holding its rate constant

may be easing". However, we would contrast those comments with the tightening in

financial conditions that has occurred over recent months. That has meant the OCR is

more restrictive for the same level of the OCR compared with previous cycles.

If the RBNZ will hike 'pre-emptively', why not in May?

One pushback from clients recently has been if the RBNZ does decide to act pre-