Despite its tendency to produce surprises at its rate-setting meetings, it feels like the Reserve Bank of New Zealand has completed its hiking cycle. With the market endorsing a pause at this week’s gathering, the kiwi has to look elsewhere for a potential boost against the US dollar.
Events since the last RBNZ meeting
A total of six central banks will update the market on their rate decisions during July. With the next-door Reserve Bank of Australia announcing a pause last week, the focus has shifted to the RBNZ. The market is overwhelmingly expecting no change at the current official cash rate. There is an 8% probability of a surprise 25 bps rate move on Wednesday, as some market participants still have the April events fresh in their minds.
However, the wider environment is slightly different now. With China’s growth failing to pick up pace and the euro area slowing aggressively, the global growth outlook is becoming more complicated. In addition, the inflation-related monthly domestic indicators like the ANZ commodity price index are pointing to a gradual deceleration of price pressures, matching similar indicators across the globe.
However, this perceived inflation slowdown has to be confirmed by the CPI figures for the second quarter of 2023, released on July 19. It is fair to assume that the Monetary Policy Committee will probably have an early preview of these numbers at Wednesday’s meeting. The RBNZ’s own inflation projections had the headline figure dropping to 2% by September 2025, in line with its recently updated remit.
Looks tough for the RBNZ to deliver a hike
There are a few reasons for Orr et al to consider another 25bps rate hike. Chief amongst them is the continued improvement in domestic sentiment. Various confidence surveys show a pickup in consumer sentiment and business activity despite the 525 bps of cumulative rate hikes over the two years. In the meantime, the RBNZ could be feeling some political pressure as the next General Election will be held in October 2023. The incumbent government is neck-and-neck with the main opposition group.
Having said that, it seems appropriate for the RBNZ to pause at this meeting and prepare for the August 16 gathering. This way RBNZ members will have enough time to evaluate the announcements and the impact of the end-of-July meetings by both the Fed and the ECB, and also examine their own freshly prepared economic projections. Compared to Western central banks, August is a “live” meeting for the RBNZ as it has announced rate movements in its recent history despite the understandably lower liquidity conditions.
Kiwi would enjoy some boost
The kiwi has been gradually weakening against the US dollar during 2023. Disappointment following the May 24 RBNZ meeting produced a sizeable sell-off that led to the lowest 2023 print of 0.5984 on May 31. The kiwi has been recovering somewhat since, as the market has turned its focus at the end-of-July Fed meeting.
Confirmation of expectations for a pause on Wednesday would cause a small disappointment and thus prompt a sell-off in the kiwi/dollar pair. In this case, a move towards the 0.6060-0.6092 area looks plausible. In the likely event of a rate hike, kiwi bulls will probably react with enthusiasm. The 0.6171-0.6187 area is unlikely to stand in the bulls’ way, as the main target would probably be closer to the 0.6272 area, a tad above the midpoint on the recent rectangle.
