Inflation expectation, as measured by the RBNZ’s two year ahead measure, were virtually unchanged in Q2. The two year head measure nudged up just slightly to 1.64% from 1.63% in the previous quarter. There was also some pick up in expectations for inflation one year head, which rose to 1.22% from 1.09% in March.
However, the inflation gauge remained at the second lowest levels since June quarter in 2014 and weighed heavily on the sentiment around the NZD. Inflation expectations remain well below the mid-point of the RBNZ’s target band, at some of the lowest levels seen in around 20 years.
The slight uptick after the previous survey's surprisingly weak outcome will be of some comfort to the RBNZ. Inflation expectations playing a vital role in determining actual inflation and have been trending down for several years now. This means that the RBNZ still has some work to do so as to generate sustained pick-up inflation.
"The RBNZ will be somewhat uncomfortable with the lack of pick-up in two-year inflation expectations, as well as falling longer-term expectations," said Kate Mundy, an economist at ASB Bank. "We continue to expect the RBNZ will cut the OCR again in June and August, with risks slightly skewed to a later move."
Kiwi bulls unimpressed by a slightly better RBNZ Q2 2-year inflation expectations reading. NZD/USD deflated from 0.6840 levels, but finds major trendline support located at 0.6740.
