Inflation expectations among the country’s businesses and professional forecasters have jumped sharply, prompting market warnings that the Reserve Bank’s next move on the official cash rate could be up rather than down.
The Reserve Bank of New Zealand’s quarterly Survey of Expectations, released on Wednesday, polled 40 business leaders and professional forecasters in late April and produced one of the most pessimistic readings in years. One-year-ahead inflation expectations climbed to 3.41 percent, up from 2.59 percent three months ago, and now sit at the highest level recorded in ten quarters, going all the way back to the final quarter of 2023.
Two-year inflation expectations, the horizon the Reserve Bank watches most closely because that is where monetary policy decisions filter through into prices, also rose to 2.53 percent from 2.37 percent. Both readings sit above the midpoint of the bank’s 1 to 3 percent target band, an uncomfortable position for a central bank that has spent the past two years trying to anchor expectations after the inflation shock of 2022 and 2023.
The deterioration in growth expectations was just as striking. Survey respondents now see annual real production-based GDP growth at just 1.58 percent over the next year, down sharply from 2.03 percent in the previous survey. Two-year growth expectations slipped to 2.16 percent from 2.3 percent. Forecasters also pushed up their view of where the official cash rate will sit a year from now, marking it to 3.01 percent compared with 2.58 percent previously.
That shift in the rate outlook is the most consequential signal in the data. Markets had been positioned for the Reserve Bank to keep the official cash rate steady or even cut it later this year, but pricing has now swung in the opposite direction. According to Interest.co.nz, two further rate hikes are now fully priced by September, a remarkable reversal in tone driven primarily by the inflationary shock waves rolling through the global economy from the ongoing conflict in the Middle East.
Higher oil prices, freight disruption in the Persian Gulf, and a softer New Zealand dollar have combined to lift import costs across the consumer basket. Headline consumer price inflation already stood at 3.1 percent through the year to March 2026, brushing the top of the Reserve Bank’s target band, and the new survey suggests businesses expect that pressure to intensify before it eases. ASB senior economist Mark Smith said the conditions left little doubt about the direction of travel, telling RNZ that “OCR hikes are a matter of when and not if” given the inflationary shock now working its way through the system.
For households and businesses still adjusting to the easing cycle that began in 2024, that prospect is a difficult one. A higher cash rate flows through to mortgage rates, term deposit rates, business lending costs and the exchange rate, and the timing could not be worse for a domestic economy that the same survey indicates is decelerating. Slower growth alongside higher prices is the textbook definition of stagflation, and while economists are reluctant to use the word, the combination of a 1.58 percent growth forecast and 3.41 percent expected inflation is uncomfortably close.
The Reserve Bank’s next monetary policy statement is due on 27 May, and governor Christian Hawkesby will be acutely aware that the inflation expectations survey is one of the indicators the Monetary Policy Committee weighs most heavily. If short and medium-term expectations continue to drift upward, the case for tightening becomes harder to resist, even with growth slowing. As Bloomberg noted in its coverage of the survey, near-term expectations are now at their highest level since 2023, the period that triggered the most aggressive tightening cycle this country has seen in three decades.
There is some comfort buried in the detail. Longer-term inflation expectations, those looking out five and ten years, edged lower in the survey, suggesting forecasters still view the current pressures as a passing shock rather than a permanent dislodging of price stability. The Reserve Bank’s credibility, hard won through the painful tightening cycle of 2022 to 2023, appears to be holding at the longer horizon. But that comfort is thin given how quickly the near-term picture has turned.
The broader concern is that the country is now staring at a second supply-driven inflation episode in five years, this time on top of a household sector that has not fully rebuilt its savings buffer, a labour market where unemployment is forecast to push toward the high fives, and a fiscal position with little spare room. Westpac warned earlier this week that growth could slow to 1.5 percent this year and unemployment could rise to 5.6 percent, and the RBNZ survey now points firmly in the same direction.
For workers asking for pay rises, business owners pricing contracts, and homeowners on fixed mortgages rolling off cheap rates, the next six weeks will set the tone for the rest of 2026. The Reserve Bank’s 27 May statement, followed by the June quarter CPI release in July, will determine whether expectations stabilise or continue to push the central bank toward a tightening cycle the economy can ill afford.
What do you make of the Reserve Bank’s likely next move? Leave a comment below and let us know.
See also NZ Economy Now — Newswire’s live dashboard of the indicators the Reserve Bank watches when it sets the OCR.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job 🙂
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