Publish: Friday, May 17, 2020
Analysts at ING said that the Reserve Bank of New Zealand is expected to maintain its official cash rate (OCR), which currently stands at 5.50%, during its meeting on 22 May.
Market participants are closely watching the Bank’s latest economic projections, and any changes to its forward-looking statement. The RBNZ, unlike its peers, makes less frequent announcements about its policies and relies heavily on quarterly data regarding inflation and employment. This can cause rapid shifts in policy.
New Zealand’s inflation has been high for a long time. Non-tradeable prices, which are a major concern, registered at 5.8%, above the RBNZ forecast of 5.3%, in the first three months. Overall inflation was 4.0% which is slightly higher than the Bank’s forecast of 3.8%.
The RBNZ will closely monitor the non-tradable inflation risks, which could still be biased upwards, despite a possible decrease in headline inflation of around 3.6% on an annual basis for the second quarter.
The economic indicators paint a contradictory picture. Both growth and employment are slipping. The unemployment rate increased to 4.3% during the first quarter. Wage growth slowed down, and the economy was in recession, with a GDP that shrank by 0.1%.
These signs may be indicative of a cooling in the economy, but because RBNZ has only focused on inflation since changing its mandate in December, these factors are unlikely to directly affect its policy decisions.
In May, the RBNZ will likely maintain its hawkish stance and keep its projection profile for rates largely unchanged. This would mean no rate reductions, and the small possibility of an additional rate increase in 2020. Then in 2025 there is a 75 basis point easing.
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The Bank will likely reiterate that interest rates must remain at a low level for a long time to keep annual inflation within the target range of 1 to 3 percent.
The RBNZ believes that inflation will return to its target range before year’s end, but the chances of a rate cut occurring before the fourth quarter are low due to the delayed data and the persisting risk of non-tradable inflation.
If the Federal Reserve does ease by 75 basis points, as expected, the RBNZ may consider one or even two rate cuts for the fourth quarter 2024.
New Zealand’s dollar (NZD) has surged 3.7% since May 1st, boosted by lower US yields and improved risk sentiment. It is also supported by a monetary policy in New Zealand that offers attractive carry.
The RBNZ may have not had a significant impact on the market with its May decision, but a reaffirmation that it is hawkish could result in a recalibration domestic rate expectations. This would further strengthen the NZD.
The NZD will remain closely linked to the Federal Reserve’s policy and the upcoming New Zealand data. Important reports are due on 16th July (CPI), 6th August (jobs report) and another RBNZ Meeting is scheduled for 10th July.
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Source: Investing.com