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The Reserve Bank of New Zealand’s Monetary Policy Committee left the Official Cash Rate unchanged at 5.5% Wednesday – its third consecutive pause – and downgraded concerns over economic strength, lowering chances of a November hike, while indicating that rates could remain at restrictive levels for longer.
The overnight index swaps market responded quickly, lowering rate expectations 2-3bp across meetings beyond October. (See NZGBS: Richer After The RBNZ Hold) The market had priced in a 58% chance of a November hike before today’s meeting, but that dropped to 49% after the publication of the minutes. The RBNZ-dated OIS had priced in a 17% chance of a move higher today.
GDP CONCERNS
Prior to today's decision, several former RBNZ staffers had warned stronger data points, such as the recent June quarter GDP result, could force the MPC to raise in November should economic strength persist. (See MNI: Wildcard Data Raises Chances Of RBNZ Nov Hike - Ex Staff) However, the MPC’s statement downgraded those concerns.
Q2 GDP grew by 0.9% q/q, 40bp higher than expected by the market and the central bank within its August Monetary Policy Statement, Stats NZ reported last month. The RBNZ had earlier predicted GDP to decline 0.3% over Q3 and 0.1% in Q4 before returning to growth over 2024. The MPC noted within the minutes that strong immigration and household spending had driven Q2's higher read, but demand growth continued to slow as expected.
“The more recent Performance of Manufacturing and Services Indices [PMI and PSI] and NZIER Quarterly Survey of Business Opinion [QSBO] show easing capacity pressures,” the MPC minutes showed. “The Committee noted that with monetary conditions remaining restrictive, they expect to see further declines in per capita spending and for GDP growth to be subdued.”
PMI declined to 46.1 in August from July’s 46.1, while PSI fell to 47.1 from 48.0. Business sentiment improved over the September quarter, meanwhile, but QSBO’s latest results on Oct 3 showed sentiment remained downbeat. (See chart)
HIGHER FOR LONGER
Still, the MPC stressed rates domestically and globally would likely need to remain restrictive for longer.
"Globally, headline inflation continues to fall but declines in core inflation are more gradual and uneven across economies," the MPC noted. "In discussing recent central bank policy moves, the Committee noted that policy rates are now expected to remain at restrictive levels for a sustained period of time, in order to bring inflation back to respective central bank policy target levels."
On the OCR, the MPC said interest rates may need to remain at a restrictive level "for a more sustained period of time”.
The committee's next Nov 29 decision will likely rest on labour and CPI data points. Stats NZ will publish Q3 CPI Oct 17 and will update unemployment figures Nov 1.
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.