MNI RBNZ WATCH: MPC To Hold, Await Further Data

The Reserve Bank of New Zealand Monetary Policy Committee is likely to hold its official cash rate at 5.5% when it meets on July 10, as it awaits further data and focuses on its refreshed single mandate to pull inflation back to its 1-3% target range even as the economy slows.

The RBNZ has held the OCR at its current level since May 2023 and there has been little significant data since the MPC’s last decision on May 22. (See MNI RBNZ WATCH: MPC Cites Risk Tolerance For Restrictive OCR)

Meanwhile, the overnight index swaps market has strengthened its expectations of a November rate cut and now gives a 98% chance of a 40-basis-point move lower, though investors do not expect a change at next week's meeting.

DATA LITE

While GDP grew 0.2% y/y in Q1, pulling the country out of recession following contractions of 0.1% in Q4 and 0.3% in Q3, the increase was largely driven by population growth, according to economists.

GDP per capita fell in Q1 for the sixth consecutive quarter, while the country’s population grew by 2.5%. (See chart)

GDP data showed private consumption increased 1.6%, above Q4’s 0.6% expansion, but public spending continued to fall, contracting 0.3%. Goods and services’ exports fell 0.4% q/q compared to Q4’s 3.2% increase, while imports gained 6.1%.

Market economists have noted, despite the slight growth, economic activity remains stagnant and is set to continue this sluggish trend.

Businesses sentiment remained soft in Q2 according to the NZIER Survey of Business Opinion released this week, with a net 35% of firms expecting a deterioration in the economic outlook in the coming months, compared to Q1’s 24%. Cost and price-pressure measurements also suggest inflation will continue to recede, though largely in line with the RBNZ’s expectations.

The MPC will ideally want to study Q2 CPI due July 17 ahead of any decision to change the OCR, and will focus strongly on other data from Q3. (See MNI: Chief Economist Fuels Debate Over RBNZ Rate Cut Timing) Q1 CPI printed at 4%.

SINGLE FOCUS

One former RBNZ board member recently told MNI the Bank’s refreshed focus on inflation is likely to make the MPC more cautious and delay initial rate cuts. (See MNI INTERVIEW: RBNZ's Single Price Focus To Stall Rate Cuts) The new centre-right government removed the Reserve's employment goal in late 2023.

However, one former deputy governor told MNI the slowing economy and easing by major global central banks could push the RBNZ to cut earlier than assumed, while other former staffers have noted the MPC has locked itself into an uncomfortably hawkish position with its most recent OCR track, which showed an additional hike this year as the economy slows. While they expect a cut by late 2024, conditions could justify a reduction as soon as the Aug 14 meeting.

The RBNZ, however, has stuck to its hawkish tone, with Chief Economist Paul Conway telling MNI its future OCR assumptions remain intact, with cuts still some way off.