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RBNZ survey of inflation expectations unchanged

RBNZ survey of inflation expectations unchanged at 2.7% - businesses expect inflation to cool over the next two years

Despite the continual rise in food and energy prices, inflation expectations remained anchored at 2.7%oya in February. The RBNZ's survey of 71 business managers, showed that firms expect inflation to average 2.7% in two years time. The survey came in below JPMorgan's forecast of 2.8%oya, and reflects a positive surprise on the outlook for inflation and interest rates. The survey carries significant weight down at the RBNZ and officials will take some comfort in the fact that inflation expectations have not risen further.

That said, the RBNZ will still be agitated by inflation expectations remaining in the top half of its 1-3%oya target band. Next week's monetary policy statement will reflect an RBNZ which is increasingly concerned with the downside risks to growth - from a weakening housing market and drought in major dairy producing regions - and a stubbornly high outlook for inflation. My main concern with the RBNZ's survey of businesses, however, is that it is somewhat self-fulfilling. That is, the RBNZ forecasts inflation remaining in the top of its target band, and having read this businesses then expect inflation to remain in the top of the RBNZ's target band.

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