RBNZ Preview: Key interest rate expected to remain unchanged amid above-target inflation
- The Reserve Bank of New Zealand is widely anticipated to maintain the OCR at 5.50%
- The language in the policy statement is expected to remain hawkish.
- The New Zealand Dollar has room to extend its bullish momentum against the US Dollar.
The Reserve Bank of New Zealand (RBNZ) will announce its monetary policy decision on Wednesday at 02:00 GMT and is widely expected to maintain the Official Cash Rate (OCR) at 5.50%.
Ahead of the announcement, the New Zealand Dollar (NZD) trades around the 0.6100 threshold against the United States Dollar (USD), consolidating last week's gains that drove NZD/USD to its highest level since mid-March.
What to expect from the RBNZ interest rate decision?
Market participants anticipate an on-hold decision, but given that the RBNZ holds monetary policy meetings only seven times per year, each announcement could vary from the previous and trigger sharp market reactions.
New Zealand policymakers look at quarterly inflation and employment data, and the latest available figures showed New Zealand's Consumer Price Index (CPI) increased 4.0% in the 12 months to the March 2024 quarter, according to figures released by Stats NZ, following a 4.7% increase in the 12 months to the December 2023 quarter. It was the lowest reading since the second quarter of 2021, although inflation held above the central bank’s goal of keeping it within 1% to 3%.
Regarding employment, March quarter data from Stats NZ showed the unemployment rate surged to 4.3% from 4% in the previous quarter, while the seasonally adjusted number of unemployed people rose to 134,000 (up 10,000) over the quarter. As it happens with other major economies, the labor market gave tepid signs of loosening, which are still far away from enough to abandon the tight monetary policy.
The central bank releases a Monetary Policy Review three times per year, the latest published in April 2024 and the next in mid-July, meaning the focus will be on the statement and any relevant change to the wording. Investors will pay close attention to Governor Adrian Orr's words, who previously noted that the local economy evolved broadly as anticipated by the committee, adding “core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced.” However, he also added that with headline inflation above the central bank’s target band, the Committee has limited ability to “tolerate upside inflation surprises.”
With that in mind, policymakers are widely anticipated to maintain the hawkish tilt, as they have little room to manoeuvre. As a result, the NZD/USD could jump to fresh multi-month highs.
How will the RBNZ interest decision impact the New Zealand Dollar?
The NZD/USD pair is undergoing a bearish correction, but the overall stance is bullish amid the broad US Dollar’s weakness. The Greenback has been on the back foot ever since market participants finally understood that the Federal Reserve (Fed) will maintain interest rates at record highs for most of 2024.
Valeria Bednarik, FXStreet’s Chief Analyst, says: “NZD/USD has room to extend gains beyond the recent multi-month high at 0.6146, facing the next hurdle in the 0.6170 price zone, as the daily chart shows multiple relevant highs and lows in the area. The pair can rally with no actual impact of the Committee’s wording, seen as hawkish, as previously noted. On the contrary, a dovish tilt could force NZD/USD to extend its bearish correction, with strong static support in the 0.6050 region.”
Bednarik adds: “Technical readings in the daily chart support the bullish case. NZD/USD develops above all its key moving averages, with the 20 Simple Moving Average (SMA) firmly advancing below the longer ones. A mildly bearish 100 SMA provides interim support around 0.6070 en route to the stronger one previously mentioned. Finally, technical indicators have barely retreated from near overbought levels, lacking downward strength, usually a sign of absent selling interest.”
Economic Indicator
RBNZ Press Conference
Following the Reserve Federal´s economic policy decision, the Reserve Bank Governor gives a press conference regarding monetary policy. His comments may influence the volatility of NZD and determine a short-term positive or negative trend.
Read more.Next release: Wed May 22, 2024 03:00
Frequency: Irregular
Consensus: -
Previous: -
Source: Reserve Bank of New Zealand
The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by Governor Adrian Orr’s press conference.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.