New Zealand’s RBNZ was expected to hold out, defying market bets for a rate cut

• The Reserve Bank of New Zealand is set to hold its key interest rate at 5.50% on Wednesday.
• August’s policy decision appears to be a “close path” between a hold and a cut as inflation expectations fall.
• The fate of the New Zealand dollar depends on RBNZ policy action, updated forecasts and Governor Orr’s words.

Market participants are eagerly awaiting the Reserve Bank of New Zealand’s (RBNZ) interest rate decision due at 02:00 GMT on Wednesday as it is expected to be a “close call” for the central bank.

The RBNZ is expected to keep the official cash rate (OCR) at 5.50%, holding that level from May 2023. However, the market is sharply divided, with analysts and industry experts anticipating a decision to hold rates. A Reuters poll of 31 analysts found 12 forecast a cut, with the rest backing the status quo.

On the other hand, swap markets imply about a 70% probability that the bank will cut the cash rate by 25 basis points (bps) to 5.25%. Markets are pricing in 90 basis points of easing this year and another 148 basis points in 2025.

What to expect from the RBNZ interest rate decision?

Markets leaned in favor of a dovish policy pivot from the RBNZ after the central bank’s quarterly survey showed a continued decline in inflation expectations.

New Zealand inflation expectations fell to a three-year low of 2.03% in the third quarter, compared to 2.33% in the June quarter. Meanwhile, survey data from 33 business leaders and professional forecasters put annual price increases at an average of 2.40 percent over the next year, down from 2.73 percent previously.

However, some of the other economic indicators fxstreet.com/economic-calendar” data-fxs-autoanchor=””>ă suggest the RBNZ may extend the pause. Non-tradable inflation remains a concern for the central bank as domestic inflation remains Stubbornly high Headline inflation was 5.4% in the year to June quarter, down from the 5.8% print in the second quarter, though still above the 5.0% level.

The country’s labor market still showed signs of tightness after Employment Change returned 0.4% in the second quarter, up from a 0.2% decline in Q1 and well above the market’s estimate of a decline of 0.2%. The unemployment rate rose from 4.4% to 4.6%, below the expected figure of 4.7%.

In addition, the ANZ New Zealand business confidence index rose to 27.1 in July from 6.1 in June, showing an improvement in business sentiment.

As the market remains divided on the likely RBNZ policy move this week, traders will pay close attention to the language of the Monetary Policy Statement (MPS) and updated economic forecasts for further clues on the bank’s interest rate outlook.

How will the RBNZ interest rate decision affect the New Zealand dollar?

The main focus will be on the RBNZ’s OCR forecasts, and a downward revision to this this year could reverberate with market expectations of an earlier than previously forecast RBNZ rate cut in the third quarter of 2025. RBNZ currently estimates that OCR will peak. to 5.65% in Q4 2024.

The New Zealand dollar (NZD) will be thrown under the bus if the central bank cuts rates by 25 bps to 5.25% while revising down its OCR forecast for 2024. In such a scenario, NZD/USD could revise the lowest in nine months. of 0.5900.

If the central bank holds the rate, any accommodative change in the policy statement and a potential downward revision to OCR forecasts could overshadow and act as a headwind for the Kiwi dollar.

NZD/USD could only extend its recovery momentum if the MPS expresses concern about sticky non-tradable goods and services inflation and acknowledges rising inflation risks by delivering a hold result. The NZD could also benefit if the bank maintains its demand bias while maintaining OCR estimates.

FXStreet Senior Analyst Dhwani Mehta provides a brief technical outlook for NZD trading on RBNZ policy announcements: “The NZD/USD pair is consolidating its recovery from the previous week, capitalizing on a bullish 14-day Relative Strength Index (RSI). on the daily chart.”

“If buyers manage to find acceptance above the 200-day simple moving average (SMA) at 0.6087, the upside will open towards the July high of 0.6154. Above, the 0.6200 threshold will be in sight. Conversely, failure to defend the 21-day SMA at 0.5974 could fuel a fresh downtrend towards the 0.5900 level, below which the April low at 0.5852 will be tested,” adds Dhwani.