MNI RBNZ WATCH: MPC To Hold, Maintain OCR Path Ahead

The Reserve Bank of New Zealand's Monetary Policy Committee is likely to hold the Official Cash Rate at 5.5% when it meets on May 22, and to maintain its outlook for cuts by the second half of 2025, as domestic and core inflation continue to prove resilient and despite a weakening labour market.

While CPI continued to rise more than predicted over Q1, the difference with the RBNZ’s February forecasts will not warrant a further hike. On most metrics, the New Zealand economy has slowed and while the Bank will not change its rhetoric around future cuts, the updated Monetary Policy Statement to be released alongside the OCR decision could give a clearer picture as to when it expects reductions to occur.

Overnight index swaps markets have tapered their end of year OCR predictions 10 basis points for the last two meetings and now expect a 5.0% interest rate by December. Traders have priced in a 1.9% cut probability for the May meeting.

The MPC has held the OCR at its current level since May 2023.

MIXED CPI, UNEMPLOYMENT RISES

Headline New Zealand inflation was 4.0% y/y in Q1, or 0.6% q/q, down from Q4 2023’s 4.7%, but 20 basis points higher than the RBNZ had estimated in its February MPS. (See chart)

Non-tradable inflation was 1.6% q/q, 30 basis points higher than expected and up 50bp from Q4, according to Stats NZ, illustrating the stickiness of homegrown price rises – a point the Reserve has keenly focused on over the last few decisions. (See MNI RBNZ WATCH: MPC Holds The Line)

Unemployment, the other major key data print since the MPC last met, rose 30bp to 4.3% over Q1 – 10bp stronger than the RBNZ’s February predictions while wages increased 4.1% y/y, down 30bp, reflecting the slowing economy. (See charts)

Inflation expectations have also fallen to near three-year lows, down 49 points to 2.73% for the one-year horizon, and down 17 points to 2.33% over two years, according to the RBNZ’s latest Survey of Expectations. Both the five and ten-year outlook were roughly unchanged. The MPC will welcome the result as evidence the public perceives its OCR as restrictive.

UPDATED MPS

The RBNZ will likely make some revisions to its inflation and OCR estimate, but large-scale adjustments are unlikely as the economy broadly tracks its assumptions, while its “hold the line” narrative from April will continue.

The Reserve will undoubtedly strengthen its headline inflation view due to the Q1 miss and could push its unemployment projections higher, but will broadly stick to its medium-term forecasts that have inflation around the mid-point of its 1-3% target and OCR cuts by the second half of 2025.

Finally, the RBNZ will also want to factor in fiscal spending before making any large adjustments to its strategy. The first budget of the current government is due May 30.