Insights 
VT 
The Reserve Bank of New Zealand’s survey for Q2 2025 indicates a rise in both 1-year and 2-year inflation expectations. The 1-year ahead inflation expectation increased to 2.41% from 2.15%, while the 2-year ahead expectation rose to 2.3% from 2.1%.
The RBNZ surveys assess inflation expectations among business leaders and professional forecasters. Over the last three quarters, the surveys have shown a general decline in inflation expectations, nearing the RBNZ’s 1–3% target band. There was a slight increase in the 1-year expectation in Q1 2025, while the 2-year expectation continued downward, suggesting confidence in medium-term price stability.
inflation Trends Over Prior Quarters
In Q1 2025, the 1-year expectation went up to 2.15% from 2.05%, and the 2-year expectation fell to 2.06% from 2.12%. During Q4 2024, the 1-year expectation dropped to 2.05% from 2.40%, with the 2-year expectation rising to 2.12% from 2.03%. For Q3 2024, the 1-year expectation decreased to 2.40% from 2.73%, and the 2-year expectation fell to 2.03% from 2.33%.
The RBNZ uses these expectations to guide its monetary policy. Declining medium-term expectations support the RBNZ’s inflation goals, possibly allowing for more accommodative policies. A rise in the two-year expectation could strengthen the NZD.
What we’ve seen in the latest Reserve Bank of New Zealand (RBNZ) survey is a clear turnaround. After several quarters of declining projections, especially in the 2-year horizon, there’s now a perceptible nudge upward both in the near term and further out. The 1-year inflation estimate has jumped by 26 basis points, while the longer-dated one moved higher by 20 basis points. Notably, these are the largest back-to-back increases we’ve seen since late 2023. That’s not nothing — it tells us something is changing in how professionals see the pricing environment over the next couple of years.
Until now, markets appeared to accept the RBNZ’s narrative — that inflation was on a path to slowly come back to target, and that monetary settings could eventually be loosened as a result. This belief was reflected in rates pricing and risk sentiment, and had been largely validated by sequential softness in expectations. However, what’s happened with the Q2 figures calls that assumption into question.
Implications for Markets and Policy
The move in the two-year number is particularly telling. That horizon traditionally carries more weight with the RBNZ, as it aligns more closely with the projected impact of current monetary settings. A firming there acts as a warning — either the policy stance isn’t as restrictive as needed, or the transmission into real prices is slower than initially judged. The one-year rise may reflect shorter-term concerns, such as fuel costs or imported prices, but still, the shift in both series warrants renewed attention.
Orr’s team may now be less comfortable standing pat. While they’re very aware of not oversteering, they also face a situation where inflation expectations — the very thing they use as a gauge of credibility — are threatening to break higher. That raises the prospect of an extended pause before any policy loosening can be seriously discussed, and possibly even prompts chatter about resuming hikes if further upside pressure appears.
For those of us who operate in forward-looking markets and care about where rates might tick over a three- to twelve-month window, this changes the underlying assumptions we had been leaning on. The RBNZ is unlikely to throw the towel in quickly, but their forward guidance may now lean more defensive. That has implications for curve positioning, particularly in swaptions or steepeners, where markets had been drifting into pre-cut postures. Those may need re-evaluation.
More tactically, we should watch for commentary around what’s driving the shifts in expectations. Are respondents simply reacting to recent CPI prints, or has something in their models and frameworks turned? If they begin to price in structural supply-side issues or stronger-than-forecast domestic demand, that’s a different story. That context would support stickier medium-term inflation and compress rate cut probabilities further.
We’d also expect NZD volatility to lift. The two-year move, especially, brings back rate differentials as a real factor in currency direction. Should the next policy statement register concern over anchored expectations, look for upward pressure on the short end of the curve. That will filter directly into spot and carry-adjusted positions.
The spacing between this data and the next policy decision is tight enough that we likely see positioning start to firm around resistance to easing, or at minimum, a recalibration in timing. Traders should be alert to any follow-through from local data or PMIs, as even incremental upside there could reinforce the new pricing for longer-term policy rates.
With this in mind, any strategies built around softening stances should be revisited. A more appropriate tilt may be towards shorting the belly of the curve or protecting against a flattening bias. Risk-reward has shifted — not dramatically, perhaps, but the old assumptions no longer hold up under these expectations.
