VIEW: ANZ Note Higher Inflation Expectations, Reaffirm RBNZ View

ANZ note that “inflation expectations are a key driver of inflation. Having been a non-issue for decades, inflation is now very much in the headlines. History shows that inflation expectations can be self-fulfilling - if enough people expect higher inflation, then actual inflation will lift. Rising expectations can thus create a dangerous feedback loop by amplifying already too-strong inflation pressures. Inflation expectations in New Zealand have risen aggressively over the past year - and there’s a real risk that recent price spikes could cause expectations to become unanchored from the RBNZ’s 2% target for CPI inflation - especially as Omicron exacerbates already stretched domestic supply chains. The RBNZ already saw inflation expectations as the most significant risk in the February MPS, and now that risk of unanchored expectations is even stronger. This is a key reason why we think the RBNZ should hike the OCR aggressively by 50bp in both April and May. It will hurt, but its considerably better than what they would need to do to the economy if inflation expectations continue to spiral further in the wrong direction.”