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19 May 2015
RBNZ inflation expectations: Modest lift in 2-year measure, NZD jumps higher – ANZ
FXStreet (Barcelona) - Mark Smith, Senior Economist at ANZ, reviews the RBNZ survey of inflation expectations and further shares the key points and impact post the release.
Key Quotes
“The reading from the key 2-year ahead measure of inflation expectations ticked up to 1.85% in Q2 (from 1.8% in Q1). Directionally this is a modest surprise.”
“However, it is important to note that the RBNZ Survey of Expectations has its shortcomings. The small increase doesn’t excite us, just as a small fall wouldn’t have done. Moreover, the sample size is small, typically less than 80 respondents, and movements in surveyed measures of inflation expectations are typically concurrent with actual CPI outturns and petrol prices in particular. It’s easy to surmise that the lift will reflect the fact that petrol prices rose over the current quarter. Inflation expectations surveys have tended to have a positive bias too.”
“The market has however jumped on the small lift in the 2-year-ahead measure. The NZD rose half a cent. That’s somewhat telling. If a 0.05% movement in a partial survey can elicit that sort movement in the NZD one wonders what could happen to the NZD if the RBNZ doesn’t cut as is currently pricing into the market (although split over various quarters).”
“There are two other important points worth noting:
1. The last time 2-year-ahead inflation expectations have been around these levels, headline inflation was actually negative (-0.5% in the September 1999 year). This suggests to us that something else is going on within the inflation process weighing on inflation expectations other than just low headline inflation itself.
2. This marked the second consecutive quarter in which the 2-year-ahead measure has undershot the midpoint of the RBNZ’s inflation target. Importantly, the last time inflation expectations were at current levels, the mid-point of the RBNZ’s inflation target was 1.5% and not 2%. You can see the historical “positive” bias over time and the past couple of quarters beg the question of whether something with regard to the evolution of inflation is going on. We suspect so.”
“The RBNZ has explicitly stated that it is watching price and wage setting outcomes and whether they “settle at levels lower than is consistent with the inflation target.” Today’s survey is certainly not the be-all and- end-all, and people will slice and dice it a number of ways. It’s up marginally and petrol prices will be to blame, but is still low in general. We still expect 25bp cuts in June and July.”
Key Quotes
“The reading from the key 2-year ahead measure of inflation expectations ticked up to 1.85% in Q2 (from 1.8% in Q1). Directionally this is a modest surprise.”
“However, it is important to note that the RBNZ Survey of Expectations has its shortcomings. The small increase doesn’t excite us, just as a small fall wouldn’t have done. Moreover, the sample size is small, typically less than 80 respondents, and movements in surveyed measures of inflation expectations are typically concurrent with actual CPI outturns and petrol prices in particular. It’s easy to surmise that the lift will reflect the fact that petrol prices rose over the current quarter. Inflation expectations surveys have tended to have a positive bias too.”
“The market has however jumped on the small lift in the 2-year-ahead measure. The NZD rose half a cent. That’s somewhat telling. If a 0.05% movement in a partial survey can elicit that sort movement in the NZD one wonders what could happen to the NZD if the RBNZ doesn’t cut as is currently pricing into the market (although split over various quarters).”
“There are two other important points worth noting:
1. The last time 2-year-ahead inflation expectations have been around these levels, headline inflation was actually negative (-0.5% in the September 1999 year). This suggests to us that something else is going on within the inflation process weighing on inflation expectations other than just low headline inflation itself.
2. This marked the second consecutive quarter in which the 2-year-ahead measure has undershot the midpoint of the RBNZ’s inflation target. Importantly, the last time inflation expectations were at current levels, the mid-point of the RBNZ’s inflation target was 1.5% and not 2%. You can see the historical “positive” bias over time and the past couple of quarters beg the question of whether something with regard to the evolution of inflation is going on. We suspect so.”
“The RBNZ has explicitly stated that it is watching price and wage setting outcomes and whether they “settle at levels lower than is consistent with the inflation target.” Today’s survey is certainly not the be-all and- end-all, and people will slice and dice it a number of ways. It’s up marginally and petrol prices will be to blame, but is still low in general. We still expect 25bp cuts in June and July.”