The Reserve Bank of New Zealand (RBNZ) survey for Q2 2025 shows an increase in both 1-year and 2-year inflation expectations. The 1-year forecast jumped to 2.41% from 2.15%, and the 2-year forecast rose to 2.3% from 2.1%. RBNZ surveys gather insights from business leaders and experts about inflation expectations. In recent quarters, these surveys indicated a general decline in inflation expectations, approaching the RBNZ’s target range of 1–3%. The 1-year expectation slightly increased in Q1 2025, while the 2-year expectation continued to fall, indicating confidence in stable prices in the medium term.

Inflation Trends Over Prior Quarters

In Q1 2025, the 1-year expectation rose to 2.15% from 2.05%, while the 2-year expectation dropped to 2.06% from 2.12%. In Q4 2024, the 1-year expectation fell to 2.05% from 2.40%, and the 2-year expectation went up to 2.12% from 2.03%. In Q3 2024, the 1-year expectation decreased to 2.40% from 2.73%, while the 2-year expectation dropped to 2.03% from 2.33%. The RBNZ uses these expectations to shape its monetary policy. Lower medium-term expectations support the RBNZ’s inflation targets and may enable them to adopt more flexible policies. A rise in the two-year expectation could strengthen the New Zealand dollar (NZD). The latest RBNZ survey shows a significant change. After several quarters of falling projections, especially for the 2-year outlook, we now see an upward trend in both the short and longer terms. The 1-year inflation estimate increased by 26 basis points, while the 2-year estimate rose by 20 basis points. These are the largest consecutive increases since late 2023, indicating a shift in how experts view the pricing landscape for the next couple of years. Previously, markets believed the RBNZ’s view that inflation would gradually return to target, which would allow for relaxed monetary settings. This belief was reflected in interest rate expectations and general market sentiment, supported by declining inflation projections. However, the Q2 figures challenge that viewpoint.

Implications for Markets and Policy

The increase in the two-year expectation is particularly noteworthy. This time frame is more important to the RBNZ since it relates closely to the current monetary policy’s effects. A stronger two-year forecast may indicate that the current policy isn’t as restrictive as needed, or that it takes longer to influence actual prices. While the rise in the one-year expectation might stem from short-term concerns, like fuel costs or import prices, the change in both forecasts requires careful consideration. Orr’s team might now be less inclined to maintain the current policy. They are aware of the need to avoid overreacting but face rising inflation expectations, which they monitor for credibility. This situation raises the possibility of postponing any discussions about loosening policies and might even bring discussions of rate hikes back to the table if inflation pressures increase. For market participants who focus on where interest rates might move over the next few months, these developments alter the assumptions that were previously in place. The RBNZ won’t rush to change its stance, but it may adopt a more cautious forward outlook. This shift impacts curve positioning, especially in swaptions or steepeners, which may need reassessment. It’s essential to keep an eye on what influences these expectations. Are they just reacting to recent Consumer Price Index (CPI) data, or has something fundamental in their analysis changed? If they begin to factor in lasting supply-side problems or stronger domestic demand than anticipated, that would indicate more persistent medium-term inflation and lessen the chances of rate cuts. We can also expect increased volatility in the NZD. The uptick in the two-year expectation emphasizes rate differentials as a key factor in currency movements. If the next policy statement highlights concerns about inflation expectations, we could see upward pressure on the short end of the yield curve, impacting spot and adjusted carry positions. The time between this data release and the next policy decision is short, so we might see the market shift towards resistance against easing or at least recalibrating timelines. Traders should be alert to any developments from local data or PMIs, as even minor positive shifts could reinforce the new outlook for long-term interest rates. Given these changes, any strategies based on expectations of easing should be reconsidered. A more sensible approach might involve shorting the mid-range of the yield curve or guarding against a flattening trend. The risk-reward scenario has shifted, even if only slightly, and previous assumptions no longer align with current expectations. Create your live VT Markets account and start trading now.

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