NZD: inflated expectations?

The NZ rates market is more than 60% priced for a 75bp rate hike by the RBNZ
next week. Inflation remained higher than the RBNZ expected in Q3, and the
central bank’s rhetoric has been uncompromisingly hawkish. So far the re-opening
of NZ’s international border is yet to lead to a boost to labour supply that would
cool the labour market. Indeed, wages growth continued to accelerate in Q3 and
the unemployment rate remained pinned down at a record low of 3.3%. So NZ is
at risk of entering a wage-price spiral similar to that being experienced in the US.
Whether or not such a spiral is emerging can be measured in the inflation
expectations of corporates. Higher corporate inflation expectations would feed into
higher selling prices and higher wage demands. So, the release of the RBNZ’s
survey of 2Y-ahead corporate inflation expectations on Tuesday will be important
for market pricing around the central bank’s meeting next week. In Q3, these
inflation expectations dipped from 3.29% to 3.07% and just above the RBNZ’s
1-3% inflation target. The RBNZ said that while it was heartened by this dip, it was
still above where it wanted to be – the centre of the its target. A further dip in
2Y-ahead corporate inflation expectations would see the market reduce pricing for
a 75bp rate hike by the RBNZ next week and weigh on the NZD. Reacceleration
would likely confirm a 75bp rate hike and grant the NZD support, especially against
the AUD.

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