The Reserve Bank of New Zealand (RBNZ) will release its interest rate decision on Wednesday (1am GMT) and is expected to maintain the Official Cash Rate (OCR) unchanged at 5.50%.
While investors anticipated that the RBNZ could raise rates again to manage sticky price pressures, they have pared rate-hike expectations after RBNZ Governor Adrian Orr warned of over-tightening risks. Last week, Orr said that the central bank will need to do more work to bring down core inflation but also recognised potential economic risks associated with further rate hikes. New Zealand’s inflation is at 4.7%, which is more than double of the required rate of 2%. This fact has weakened hopes of the RBNZ pivoting to rare cuts, at least for the time being.
NZD/USD
The NZD/USD pair remains under some selling pressure for the second consecutive day on Tuesday and has dropped to a one-week low during the Asian session. The USD has been slightly weaker which has limited any further downside for the NZD/USD. However, the greenback is not expected to fall further as investors are convinced that the Federal Reserve (Fed) will keep interest rates higher for longer due to stubborn inflation and a strong US economy.
The main event currently for the pair is the RBNZ decision, but investors and traders may also monitor the release of macroeconomic data from the US, including Durable Goods Orders, the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index. The highlight of the releases will be the US Personal Consumption Expenditures (PCE) Price Index due out on Thursday, which could influence the Fed’s future policy decisions and may provide fresh direction to the USD and the NZD/USD pair.
RBNZ rate decision
The RBNZ is expected to keep the Official Cash Rate (OCR) steady at 5.5% on Wednesday, but the possibility of a rate hike is still on the table due to persistently high inflation. The market is pricing in a 25% chance of a rate hike after the RBNZ has maintained the rate since May last year. Additionally, hawkish comments by several RBNZ policymakers have pushed the NZD higher against the USD. Chief economist Paul Conway said last month that the central bank has a long way to go to bring inflation back to its 2% target.
Economists at TD Securities have noted that the RBNZ’s subsequent easing cycle is likely to be more aggressive and they still expect 100 bps of cuts in the easing cycle but anticipate the first 25 bps cut to be delivered in November instead of August.
For tomorrow’s meeting, they forecast a 25 bps interest rate hike and another one in May to take the OCR to 6%. Consequently, the eventual easing cycle will become more aggressive with a total of 200 bps of rate cuts to be delivered throughout the year. ANZ also believes that the RBNZ will hike tomorrow and again in April to bring the OCR to 6%. They don’t believe the central bank is confident that they have done enough to reach their inflation mandate and they will need to see more progress on non-tradables inflation.