While the month of August is not usually associated with rate-setting meetings, the Reserve Bank of New Zealand holds its 5th gathering for 2023 on Wednesday. No fireworks are expected but there is a very small chance of the Committee adopting a slightly more hawkish tone to support the ailing kiwi, especially against the US dollar.
Events since the last RBNZ meeting
The July 12 meeting confirmed expectations with the RBNZ standing pat at 5.5%. The accompanying statement and minutes were seen as mostly dovish, especially when considering the committee members’ comments about global growth. China was explicitly mentioned as it remains the growth barometer in this region, and its continued economic underperformance, despite the recent measures to bolster consumption, is proving a strong headwind for global growth.
Crucially, the Committee’s comment that “monetary policy reached a more restrictive level earlier than in many other economies” appears to have firmly shut the door for another rate hike in the foreseeable future. The RBNZ’s own projections reflect this situation with May’s Monetary Policy Statement showing the official cash rate being unchanged until the second quarter of 2024, and a rate cut expected in the third quarter of 2024.
The market is not really disagreeing as it is assigning an impressive 1% probability for a 25bps rate hike at this week’s meeting. However, there are still some pockets of the hawkishness manifesting with a more sizeable 45% probability priced in for a rate hike by April 2024. However, this is too far out to support the kiwi at this stage.
On Wednesday we will get a new set of RBNZ projections and even small tweaks in the policy rate projections are clearly not on the agenda. Having said, economic data releases since the July meeting have been mostly positive. Headline inflation for the second quarter of 2023 came above expectations at 6%, but below the previous quarter’s print of 6.7% and RBNZ’s own forecast of 6.1%. It therefore remains at very elevated levels, but the RBNZ is projecting a drop to 2.5% by December 2024. Naturally, an upgrade to the inflation profile at Wednesday’s projections – mostly on the back of the recent oil performance – could infuse some life into the subdued rate hike expectations.
With the Fed and the ECB adopting a data-dependent strategy and certain parts of the market assuming that both have concluded their rate hiking cycles, the RBNZ is expected to keep rates unchanged at 5.5% on Wednesday. It makes sense for Orr et al to wait for the Jackson Hole gathering where Fed Chairman Powell could present his thoughts regarding the rest of 2023.
Additionally, any significant announcements could be delayed until the next RBNZ meeting that is scheduled for October 4. The Committee will have the luxury of evaluating the various central meetings taking place during September while also examining the second quarter GDP figures expected on September 21.
Kiwi is having a rough time lately
The kiwi-dollar pair has dropped to a new 2023 low after decisively breaking below the rectangle that has defined the price action for most of this year. It has been a one-way street since the July 13, 2023 peak with the pair dropping almost 7%, making the kiwi one the worst performing currencies for 2023. The path of least resistance remains for a lower kiwi-dollar pair, partly due to the muted expectation for the RBNZ meeting. However, if the RBNZ props up its hawkishness and/or increases its inflation outlook profile, we could see an attempt by the kiwi bulls to stage a return inside the aforementioned rectangle.
