RBNZ Tipped to Hold Rates Steady Again This Week

The Reserve Bank of New Zealand is due to meet on Monetary Policy on Wednesday this week, with the decision to be published at 2:00 AM GMT and Press Conference to follow an hour later. Unlike from July’s meeting, this week there will also be a Monetary Policy Statement accompanying the announcement, which will provide details about the outlook for inflation and interest rates.

Most analysts expect that the RBNZ will keep rates on hold again at this meeting. However, with some of the economic data coming in recently, it's difficult to see how the bank can maintain its previous timeframes for bringing inflation back to target and beginning to cut interest rates back down again. This is what will be of most interest to markets this week.

Let's take a look at what's been happening for the island nation in recent months with the economy as a whole, employment, and inflation as it relates to this upcoming meeting.

Last month’s recap

As was widely anticipated, the RBNZ kept the official cash rate unchanged at 5.50% in July, but since October 2021, the bank has increased borrowing rates by a whopping 525 basis points, sending the county into a mild technical recession this year.

The board last month suggested that the current level of interest rates was impeding both spending and inflation pressures as it should. It was also noted, however, that the official cash rate (OCR) would need to be maintained at a level of restriction for some time in order to achieve an annual inflation rate within the target range of 1% to 3% by the second half of 2024.

The committee assessed that the risks associated with the inflation prediction were generally balanced, given the ongoing alleviation of supply bottlenecks and the data supportive of a cooling labor market.

New numbers suggest rates may remain higher for longer

After a 6.7% rise in the first quarter of this year, headline inflation in New Zealand slowed to a 6% increase from the same period a year prior in the second quarter. Although prices are still rising at rates not seen since for decades, it was the lowest number since the fourth quarter of 2021, and better than the bank had previously forecast.

Although the recent drop in inflation was significant, in truth, the decline was mostly due to falling fuel costs. In the meantime, the core rate, which measures domestically produced inflation excluding fuel and other volatile items, had decreased only a small amount from 6.8% to 6.6% when the RBNZ had anticipated it to decrease to 6.3%.

The Business Inflation Expectations were also released on Wednesday last week, with the most monitored measure, the expectation of inflation in two years' time, increasing to 2.83% from 2.79% in the first quarter. This is in stark contrast to the RBNZ's May projection that inflation will be comfortably at its target level of 2.0% in two years.

Then there's the employment figures.

In contrast to the previous quarter's reading of 3.4% and beyond market expectations of 3.5%, the unemployment rate jumped to 3.6% in the second quarter of 2023, marking the highest reading since mid 2021. In the meantime, the employment rate was reported at 69.8%, up from an upwardly revised 69.6% in the prior quarter, while the labor force participation rate at 72.4%, was the highest percentage seen since 1986.

In May, the RBNZ predicted that the unemployment rate would spike to 4.1% in the third quarter and 4.6% in the fourth. While most economists can agree that the rate will definitely increase this year, it's hard to see the labor market going to pieces quite that quickly.

Another factor the bank will very much be taking into account, is the state of the country’s GDP. According to the most recent national accounts of New Zealand, the country experienced a "technical recession" during the March quarter, which is characterized by two consecutive quarters of negative GDP. New Zealand’s economy contracted by 0.1% quarter over quarter in the three months to March, following a 0.7% dip in the previous quarter.

In closing

The RBNZ will likely keep rates on hold again this week, but if the bank does make any changes to the outlook, it will most likely delay the predicted date for when the OCR begins to fall from the current 5.50% as well as inflation expectations. According to the bank's own projection made in May, the OCR is expected to remain at 5.50% until the second half of 2024, after which point it will gradually decrease.

The market too was getting ahead of itself for a while and pricing in that interest rates would begin to be slashed far too soon, some thought as early as later this year. However, based on present prices, the possibility that the OCR will actually increase again before the end of the year is growing, and therefore, that reductions likely won't start at least until after mid next year. But only time will tell.

The NZD/USD currency pair lost more than 7% since its July 14th peak of 0.64113, \ and is hovering close to its previous low. The pair is now trading at its lowest level since November 2022, below the Ichimoku cloud and all lines of the Japanese indicator including the Lagging Span, which is moving downward below the indicator and the price. The RSI indicator is bearish and moving into its oversold territory. The ActivTrader’s market sentiment is, however, showing that traders are thinking that the NZD/USD pair might bounce back, as 92% are holding buying positions.

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