The RBNZ would have breathed a big sigh of relief last week as inflation expectations finally made their way home to the 2% sweet spot. It’s a big accomplishment. And something the RBNZ would have been itching to cross off their list for a long time. Inflation expectations began to drift above target in September 2021 as actual inflation began picking up. And in December 2022, the all important 2-year ahead measure hit a series-high of 3.62% - well outside the RBNZ’s 1-3% target band. The RBNZ’s credibility as an inflation fighter was under fire.
Since then, aggressive monetary policy has worked to bring down actual inflation, and with it inflation expectations. It’s taken time. And a lot of pain. But last week finally saw that pain pay off as inflation expectations dropped back to the RBNZ’s 2% target midpoint. The 2-year ahead measure dropped a whopping 30bps to 2.03% - matching the 10-year ahead measure. While the 5-year ahead measure dropped 18bps to 2.07%.
Inflation expectations are back at the midpoint. Headline inflation will follow. By our forecasts, inflation should be back within the RBNZ’s target band by the current (September) quarter, and on its way to 2% in 2025.
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