Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
The Reserve Bank of New Zealand's monetary policy committee is likely to hold the official cash rate at 5.5% when it meets next week, but it will debate a cut and inject greater dovish language into its communications as it prepares for reductions later this year.
The economy has slowed and inflation moved towards the RBNZ’s 1-3% target faster than expected in Monetary Policy Statement (MPS) forecasts in May. However, the Reserve’s past comments and its reduced mandate, which no longer requires it to target employment, suggest it will take a cautious approach to any rate adjustment and may wish to examine Q3 inflation and GDP before cutting the OCR.
The updated MPS, to be published alongside the rate decision, will also point to lower CPI and OCR assumptions.
The Reserve has held the OCR steady since May 2023. The overnight index swaps market has priced in a 71% chance of a cut at the August meeting and a 4.6% OCR by the end of 2024.
CPI & LABOUR
New Zealand’s headline consumer price index fell to 3.3% y/y in Q2, from 4% in Q1, 30 basis points lower than the Reserve’s May forecasts, while non-tradable inflation printed at 5.4% y/y, down from Q1’s 5.8%. (See chart)
Inflation expectations have also fallen, according to the RBNZ Survey of Expectations, which showed public perceptions of price rises from one-10 years firmly anchored at about 2%. (See chart)
The labour market in contrast has held along the RBNZ’s May forecast, rising 20 basis points to 4.6%. However, hours worked dropped 1.2% q/q, while part-time jobs drove employment growth. The seasonally-adjusted underutilisation rate rose 40bp over the quarter to 11.8% y/y.
MAY’S MISTAKE
The RBNZ was heavily criticised for its confusing message when it last updated its MPS in May. Ex staffers questioned the OCR assumptions, which showed cash hikes despite evidence of a slowing economy. (See MNI: RBNZ Cuts Incoming, Ex Staffers Question OCR Predictions)
However, Chief Economist Paul Conway told MNI at the time cuts were some way off and pointed to the higher level of non-tradable inflation. (See MNI INTERVIEW: RBNZ Credible, Cuts Still Distant - Conway) “We're on track, but I guess there's just a different view around what needs to happen to interest rates from here to get us back to the 2% [target],” Conway told MNI.
CUTS CASE
Former staffers have called on the RBNZ to begin rate cuts. Weak job growth will impact consumer spending, retail sales and GDP, staffers noted. However, while the staffers think the RBNZ should cut, they give a move lower at the August meeting a 50-60% chance.
But one former board member warned MNI the Bank’s renewed singular focus on inflation could lead it to hold the OCR higher for longer.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.