- The Reserve Bank of New Zealand is set to hold the interest rate at 5.50% on Wednesday.
- The language in the policy statement will offer cues on the RBNZ interest rate outlook.
- The New Zealand Dollar braces for a big reaction to the RBNZ policy announcements.
The Reserve Bank of New Zealand (RBNZ) is widely expected to maintain the Official Cash Rate (OCR) at 5.50% for the sixth consecutive meeting in a row following the conclusion of its monetary policy meeting on Wednesday.
The New Zealand Dollar (NZD) is primed for a big market reaction to the RBNZ policy announcements despite the absence of RBNZ Governor Adrian Orr’s press conference and the publication of updated economic projections.
What to expect from the RBNZ interest rate decision?
As a rates on-hold decision is fully priced in, markets will closely scrutinize the language and the tone in the Reserve Bank of New Zealand’s Monetary Policy Statement (MPS).
After extending the pause in February, the RBNZ policy statement stated, “conditional on our central economic outlook, we expect the OCR will need to remain around current levels for an extended period for the Monetary Policy Committee to meet its inflation target.”
Speaking at the post-policy meeting press conference, Reserve Bank of New Zealand’s (RBNZ) Governor Adrian Orr noted that “we did discuss a hike in rates”, adding that there was a “strong consensus that rates were sufficient.”
Orr said that he is “still concerned about underlying inflation, how grown inflation is easing.”
Since the February meeting, little data of note has been released from New Zealand to help gauge the timing of the RBNZ’s likely policy pivot. However, with New Zealand’s economy facing its second recession in 18 months and consumer confidence dipping sharply, markets may not be surprised by a dovish hold.
New Zealand’s Gross Domestic Product (GDP) growth contracted 0.1% in the fourth quarter of 2023, following a 0.3% contraction in the third quarter. Meanwhile, ANZ-Roy Morgan New Zealand Consumer Confidence fell by 8.1 points in March to 86.4.
Markets are currently pricing in the first RBNZ’s rate cut in August, with a 75 bps of total easing this year, per BBH Analysts.
On the other hand, the RBNZ could stick to its language from the February MPS, awaiting the first-quarter Consumer Price Index (CPI) report and the labor market data before contemplating any change in its policy outlook.
Data published by Stats NZ showed that New Zealand’s annual Consumer Price Index (CPI) increased by 4.7% for the December quarter, the smallest annual rise in more than two years. However, the figure still remains much above the RBNZ target of 1.0%-3.0%.
Previewing the RBNZ policy announcement, analysts at TD Securities noted: “The RBNZ is expected to keep the OCR on hold at 5.50%. Limited data flow since the February MPS suggests the Bank delivers a similarly worded Statement again.”
“GDP released a week after the February MPS missed the Bank’s forecast by a whisker but higher oil prices, weaker NZD, monthly survey releases with price and employment data suggest the inflation outlook still looks challenging,” the analysts added.
How will the RBNZ interest decision impact the New Zealand Dollar?
Risks appear skewed to the downside for the NZD/USD pair heading into the RBNZ showdown on Wednesday, as the US Dollar keeps the upper hand across the board following robust Nonfarm Payrolls data that prompted investors to dial down expectations for a June US Federal Reserve (Fed) rate cut.
Furthermore, expectations of an RBNZ status quo also leave the Kiwi Dollar in the back seat, with a fresh sell-off likely on the cards should the RBNZ policy statement hint toward an earlier-than-expected rate cut.
Conversely, if the MPS suggests that the RBNZ could stick to its “higher for longer” interest rate view amid elevated inflation level, the NZD/USD pair could regain the recovery momentum from five-month lows of 0.5939.
Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the New Zealand Dollar on the RBNZ policy announcements: “The NZD/USD pair is challenging the critical 21-day Simple Moving Average (SMA) at 0.6036 on its road to recovery. The 14-day Relative Strength Index (RSI) indicator, however, is still holding below the 50 level, suggesting that sellers are likely to hold the reins.”
“The immediate upside hurdle is seen at the horizontal 200-day SMA at 0.6068, above which the 0.6100 round level will come into play. NZD buyers will then target the 100-day SMA at 0.6138. Conversely, a sustained move below the 0.6000 level could open doors for a test of the April 5 low at 0.5985. Further south, the five-month kow of 0.5939 could be a tough nut to crack for NZD/USD sellers,” Dhwani adds.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.