New Zealand inflation expectations drop before RBNZ rate review

Published Tue, Feb 14, 2023 · 12:04 PM

NEW Zealand inflation expectations fell back from a 31-year high, prompting investors to reduce bets on a jumbo interest rate hike from the central bank next week.

Two-year ahead expectations eased to 3.3 per cent in the first quarter from 3.62 per cent in the fourth, which was the highest since 1991, the Reserve Bank of New Zealand (RBNZ) said on Tuesday (Feb 14) in Wellington. It next reviews its Official Cash Rate (OCR), currently at 4.25 per cent, on Feb 22.

New Zealand’s dollar and swap rates fell after the report. There is now a 30 per cent chance of the RBNZ raising the OCR by 75 basis points next week, down from a 50 per cent likelihood earlier Tuesday, according to swaps prices.

“Inflation pressures are looking less alarming than they did back in November,” said Satish Ranchhod, senior economist at Westpac Banking in Auckland. “Consequently, it looks like the extent of OCR increases required to rein in inflation doesn’t need to be as large as the central bank previously anticipated.”

Most local bank economists are predicting the central bank will resort to a 50-point hike next week after a record 75-point move at its previous review in November. Sentiment has shifted after reports showed the labour market was slightly softer than expected in the fourth quarter while inflation of 7.2 per cent was less than the RBNZ had predicted.

Today’s report showed one-year expectations edged up to 5.11 per cent from 5.08 per cent while 10-year expectations were little changed at 2.19 per cent. BLOOMBERG