Next Move Is Down, Timing Will Depend On Inflation Numbers

The RBNZ not only acknowledged the weaker monthly activity/confidence data, but downgraded its inflation worries after ramping them up in May and even added some concern that the impact of restrictive policy could be stronger than expected. Importantly, it stated for the first time that “restraint will be tempered”, signaling that the next move is down conditional on inflation moderating as forecast (Q2 CPI July 17).

• At the August 14 meeting, the RBNZ will present updated forecasts and at this juncture it looks like the first rate cut and inflation’s return to target will be brought forward again.
• After revising up Q3 CPI inflation in May to 3%, the RBNZ said in its July statement that it expects inflation to return to target in “the second half of this year” revised from “by the end of 2024”. It noted that the increase in spare capacity is putting downward pressure on domestic inflation giving it “greater certainty” that it “will sustainably decline”. This confidence has been a requirement to begin easing.
• Inflation risks are now assessed as balanced with upside stemming from persistence in near-term domestically-driven price pressures but downside from “price-setting behavior and inflation expectations” normalizing faster-than-expected as headline inflation falls.
• There is now “more evidence of excess productive capacity emerging” as demonstrated by surveys and monthly consumption and credit data. The risk that restrictive policy is “feeding through to domestic demand more strongly than expected” was an addition to the discussion.
• The MPC didn’t seem concerned about the 2024 budget and tax cuts but did note uncertainty around the impact of some policies.