NZD/USD remained in positive territory after the release of weaker Business Confidence data from New Zealand on Tuesday. Tomorrow, on Wednesday morning (2pm New Zealand time, 03:00 GMT, 22:00 US Eastern time), the Reserve Bank of New Zealand (RBNZ) will hold its monetary policy and the central bank is widely anticipated to keep interest rates unchanged at 5.5%. Last week, RBNZ Governor Adrian Orr said that the central bank is closer to getting inflation back within the desired 2% target but cautioned that inflationary pressures remain elevated.
The RBNZ was still discussing rate hikes as early as February due to higher inflation, but markets have priced in a small 4% chance of a rate cut. Nonetheless, interest rates are anticipated to remain higher for longer until inflation drops lower.
NZIER Business Confidence
On Tuesday, the weaker NZIER Business Confidence (quarter-over-quarter) weighed on the New Zealand dollar as it showed a 25% contraction in the business outlook for the first quarter of 2024, which is much higher than the 2% drop in the previous quarter.
RBNZ interest rate decision
The RBNZ is anticipated to remain on hold at 5.5% for the sixth meeting in a row. Traders will then turn their attention to the bank’s statement and if it is hawkish, emphasising the need for rates to remain restrictive for longer, then the NZD will find support. In February, the board noted that it would avoid loosening monetary policy until 2025.
Some analysts, however, have said that New Zealand’s weak economic prospects could increase expectations of early rate cuts. In the second half of 2023, the Kiwi economy was in a technical recession and the RBNZ could decide to reduce rates if the economic outlook continues to be weak.
Is inflation easing enough to bring it closer to the 2% target?
The question for the RBNZ is whether inflation will cool enough to meet the bank’s desired target. The RBNZ Governor confirmed that the disinflation trend in New Zealand is clear, but stressed more efforts are required. The central bank mentioned that they have an asymmetric risk function that would prioritise inflation risks and noted that the economy has limited capacity to absorb further upside inflation shocks.
The New Zealand Institute of Economic Research (NZIER) holds a “shadow board” of analysts, which is an independent body that expresses its opinion in relation to what the RBNZ should do. In this week’s meeting, the Shadows view reflects that of the market consensus, which is a hold at 5.5%. They noted that inflation is on the decline, but they expressed doubts that the pace would be sufficient to return average inflation within the inflation target band over the next 12 months.
They emphasised caution in order to see how the economy will perform over the coming months, given the uncertainty about the global growth outlook and the new Government’s priorities.
NZD/USD strengthens ahead of US CPI inflation
Ahead of the US Consumer Price Index (CPI) data due out on Wednesday, the NZD/USD pair found support as risk appetite improved. The CPI report is forecast to show an acceleration in headline CPI for March while the core measure is expected to ease. The USD may find support from comments by Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari who stressed the significance of pushing the current inflation rate of around 3% to the 2% target.