The divergence between Westpac and ASB over Thursday's Reserve Bank of New Zealand Q3 Survey of Inflation Expectations may matter more than the headline number itself, as it underscores genuine uncertainty about how deeply the oil-driven inflation shock is permeating household and business psychology — the very dynamic the RBNZ is monitoring most closely during a tightening cycle that began in October 2021, making it one of the first developed-market central banks to raise rates in what became a global shift toward monetary tightening.

A stronger-than-expected print aligned with Westpac's forecast would reinforce the argument for the RBNZ to maintain its 25 basis point hike trajectory and would likely bolster the New Zealand dollar, including against the Australian dollar on the AUD/NZD cross, as markets price in a higher terminal Official Cash Rate (OCR). A softer result closer to ASB's baseline scenario would relieve some pressure on the central bank, though it would not necessarily rule out additional tightening, given the upside risks ASB itself has identified.

In either case, the medium- to long-term expectation readings will carry significant weight in shaping how markets price the eventual OCR peak.

Banks Reach Opposite Conclusions

Two of New Zealand's largest banks are interpreting the same inflation data landscape and arriving at starkly different conclusions about the trajectory of inflation expectations.

The RBNZ's Q3 Survey of Inflation Expectations is scheduled for release on Thursday. The two-year-ahead measure — the RBNZ's preferred gauge of whether expectations remain anchored — last registered at approximately 2.5 percent, and any movement from that level will influence near-term pricing of the tightening cycle. Central banks treat these readings as critical inputs because once households and businesses begin assuming persistent inflation, wage demands and price-setting behaviour can become self-reinforcing — a dynamic far costlier to reverse than the original price shock.

Westpac: Expectations Set to Rise Further

Westpac anticipates another increase in the closely tracked one- and two-year-ahead horizons. The bank notes that inflation expectations already moved higher in the second quarter, and that conditions since then have only amplified the risk. Westpac points to substantial oil price swings during the period and headline inflation climbing back to 4.1 percent as factors likely to push households and businesses to revise their near-term price expectations upward.

Westpac's primary concern extends beyond the latest inflation figure itself, focusing instead on the potential for a broader and more persistent shift in pricing behaviour — the type of second-round effect that central banks work most aggressively to prevent. However, the bank does expect longer-horizon expectations at the five- and ten-year marks to remain comparatively stable, reasoning that the RBNZ's ongoing tightening cycle should help hold those anchors in place even as near-term readings drift.

ASB: Broad Easing Expected, but Risks Tilt Upward

ASB holds the opposite view on the headline direction, forecasting that the Q3 survey will show a broad easing in inflation expectations. The bank's rationale centres on retail fuel prices, which have fallen significantly from their mid-April peak, as well as encouraging signals from higher-frequency pricing intentions and expectations surveys that ASB expects to carry through into a softer official reading.

Nevertheless, ASB is not dismissing the downside scenario entirely. The bank explicitly flags the risk of upward drift stemming from the elevated second-quarter headline inflation figure. Its own forecast models indicate some upside risk in the Q3 readings, particularly at medium and longer horizons, should persistently high headline inflation begin to influence how far into the future households expect prices to continue rising.

For context, ASB's second-quarter survey reference points were as follows:

• One-year expectations: 3.4 percent
• Two-year expectations: approximately 2.5 percent
• Five-year expectations: approximately 2.2 percent
• Ten-year expectations: approximately 2.2 percent

Policy Implications

On the policy front, ASB expects the RBNZ to continue reinforcing its inflation-fighting credibility with steady 25 basis point rate hikes, bringing the OCR to 3.25 percent by year-end. The bank characterises this as a central scenario rather than a predetermined outcome, noting that the OCR could ultimately peak below that level if spare capacity in the economy tempers wage and price-setting pressures.

Conversely, if inflation expectations were to meaningfully decouple from the RBNZ's 1 to 3 percent target band, the risk would skew toward a higher terminal rate than currently anticipated.

This two-sided framing positions Thursday's survey as a genuine pivot point for determining how much further the RBNZ must go in its tightening cycle, rather than a procedural step before an already-settled policy decision.

The next RBNZ monetary policy decision is scheduled for September 2.