New Zealand Dollar: Inflation Survey To Keep RBNZ Rate Cuts At Bay Says Economist

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The New Zealand Dollar was the top-performing major currency on the day a major survey revealed that inflation in New Zealand was not expected to fall back to the 2.0% target for the foreseeable future, keeping expectations for another interest rate hike alive.

The Reserve Bank of New Zealand (RBNZ) inflation expectations survey showed another sharp decline in near-term inflation expectations, but longer-term expectations actually crept up, a sign interest rates will need to be kept higher for longer.

On the margin, this is a supportive development for the NZ Dollar.

The NZ Dollar has been boosted by an improved sentiment in global markets ever since last week's Federal Reserve meeting revealed that the Fed was unlikely to raise interest rates again owing to falling inflation and slowing economic growth, reinforced by Friday's soft U.S. labour market report.

In fact, the market now sees up to 100 basis points of cuts at the Fed falling in 2024. In contrast, the RBNZ might have to raise interest rates again and won't be afforded a chance to cut rates until 2025.

"We're forecasting another rate hike from the RBNZ next year. Given the lingering strength in domestic inflation and inflation expectations, we don’t think rate cuts will come on to the table until early 2025," says Satish Ranchhod, Senior Economist at Westpac.

The Bank of England and European Central Bank are also anticipated to cut rates in 2024, which suggests all the major central banks can start the cutting cycle ahead of the RBNZ, which can result in NZD upside over the coming months. 

Expectations for inflation one year ahead have dropped sharply, from 4.17% in the previous survey to 3.60%. Expectations for inflation in two years have nudged down from 2.83% to 2.76%.

"The survey’s respondents are more circumspect about the outlook for inflation further ahead. Expectations for inflation five and ten years ahead have picked up and remain above 2%," says Ranchod.

New Zealand inflation expectations, image courtesy of RBNZ.

The RBNZ is set to keep the OCR on hold at 5.50% at its meeting later this month, but 2024 could yet see another rate hike, according to Westpac: "We're forecasting another rate hike from the RBNZ next year."

If the RBNZ is hiking at a time when other central banks are becoming increasingly comfortable with the idea of cutting rates, then the New Zealand Dollar could find itself better supported over the course of 2024.

The same survey meanwhile revealed respondents now expect house prices to rise by 4.8% over the coming year (previously, a rise of only 1.4% was expected).