Last week’s data schedule was largely second-tier and a mixed bag in some respects. However, the results should still serve as warning to those who are counting on the recent run of softer than expected data to continue.
The RBNZ’s quarterly survey found that expectations of inflation two years ahead rose to 2.7% in Q1, indicating that the jump to 2.6% in the previous quarter wasn’t simply a blip. Inflation expectations are disconcertingly high for an economy in the early stages of recovery, and suggest that the RBNZ’s stated goal of keeping inflation close to 2% is not being taken seriously.
Markets routinely ignore the inflation expectations survey, and this time was no exception. But we think the data deserves a lot more attention. The RBNZ regards inflation expectations as a crucial determinant of underlying, medium-term inflation. High inflation expectations mean that, as the economy recovers, the OCR will need to do more of the work than if expectations had kept to a more ‘friendly’ level.
Business confidence improved further in February, even in the face of re-emerging concerns about the global economy in the last couple of months (note that there is no survey in January). General business sentiment rose to its highest level since November 1999, while own-activity expectations – a more reliable guide to current quarter GDP – also reached a new cycle high, consistent with our forecast of 1% growth in Q1 GDP.
