RBNZ keeps rates steady and issues dovish commentary

New Zealand's central bank held the country’s key interest rate — the official cash rate (OCR) — steady at 5.5% on Wednesday but signaled that monetary policy might become less restrictive over time if inflation slows as expected.

The decision aligned with the expectations of all economists recently polled by Reuters. However, the Reserve Bank of New Zealand's (RBNZ) accompanying commentary was more dovish than anticipated. In a statement, the RBNZ said:

"The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures”.

At its previous meeting in May, the RBNZ indicated that policy was expected to remain restrictive for a "sustained period" and suggested an interest rate hike was possible if inflation was not brought under control.

New Zealand dollar falls after RBNZ meeting

Following the announcement, the New Zealand dollar fell 0.74% to $0.6085, reaching a 16-month low against the US dollar.  

Two-year swap rates dropped 11 basis points to a six-month low of 4.6850%, implying 25 basis points of interest rate cuts in October.

Abhijit Surya, Australia and New Zealand economist at Capital Economics, said in a note cited by Reuters:  

“The RBNZ sounded rather dovish in its commentary. The Committee's messaging gives us greater confidence that the Bank will commence its easing cycle in November.”

Markets.com Chief Markets Analyst Neil Wilson issued a similar opinion on the RBNZ decision in his morning note on Wednesday: 

“The RBNZ decision was a bit more dovish than thought. The central bank signaled much more confidence that inflation would return to target, teeing up a potential cut before the end of the year. It seemed in marked contrast to the May decision, where policymakers had made sure to keep an additional rate hike on the table. The kiwi retreated after the hold.”

At the time of writing (12:20 GMT), the New Zealand dollar was down 0.72% against USD at $0.6081. As of July 10, the NZD to USD rate has declined over 3.7%, falling from $0.6328.

The Australian dollar to New Zealand dollar pair, AUD to NZD, also saw the latter’s decline, with the Aussie strengthening to $1.1093 on the day — a gain of 0.8%.

The U.S. dollar index (DXY), a measure of the greenback’s strength against multiple peers such as the Japanese yen and British pound, was slightly down on the day at 105.07 (-0.06%).

RBNZ sees New Zealand inflation falling to 1-3% target range in H2 2024

The RBNZ expects headline inflation in New Zealand to return to the 1% to 3% target range in the second half of this year, down from 4% in the first quarter.

While second-quarter inflation data will not be released until next week, components such as food prices, released monthly, have started to soften. Additionally, inflation expectations are easing, and business confidence is weak.

"Some domestically generated price pressures remain strong. But there are signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions," the central bank noted.

The rate hikes have significantly slowed New Zealand’s economy, although recent data showed that the country emerged from a technical recession in the first quarter of 2024 with 0.2% growth.

Economists now see increased likelihood of earlier RBNZ cuts

Ahead of Wednesday's rate decision, 22 of 32 economists polled by Reuters predicted interest rates would fall to 5.25% or lower by year-end, while 10 expected no change. Economists now see an increasing risk of earlier cuts — or more than one.

ANZ Chief Economist Sharon Zollner was cited by Reuters as saying:

"We highlighted last week that risks are tilting towards the first cut coming in November rather than February as we are forecasting; today's review tilts things a little further that way. But the data will decide”.

RBNZ looks likely to join global peers in cutting rates

The RBNZ, a frontrunner in withdrawing pandemic-era stimulus among global central banks, has raised rates by 525 basis points since October 2021 to curb inflation, marking the most aggressive tightening since the official cash rate was introduced in 1999.

New Zealand joins central banks globally that are beginning to consider cutting interest rates. The European Central Bank, the Bank of Canada, Sweden’s Riksbank, and the Swiss National Bank have all cut interest rates recently, and U.S. Federal Reserve policymakers are expected to have a more active debate on rate cuts at their next meeting in late July.

However, New Zealand's neighbor Australia is an exception to this trend – the Reserve Bank of Australia debated raising interest rates last month due to upside risks to inflation.

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