RBNZ expected to keep key interest rate unchanged amid increasing rate-cut talk

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

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

The RBNZ is expected to hold the Official Cash Rate (OCR) at 5.50%, maintaining that level since May 2023. However, the market is heavily divided, with analysts and industry experts anticipating a rates on-hold decision. A Reuters poll of 31 analysts, found 12 predicting a cut with the rest supporting the status quo.

On the other hand, swap markets imply a roughly 70% probability of the bank lowering the cash rate by 25 basis points (bps) to 5.25%. Markets are pricing in 90 bps 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 by the RBNZ after the central bank’s quarterly survey showed a continued drop in inflation expectations.

New Zealand's inflation expectations fell to three-year lows of 2.03% in the third quarter, compared to 2.33% in the June quarter. Meanwhile, the survey data from 33 business leaders and professional forecasters saw annual price increases averaging 2.40% over the year ahead, down from 2.73% previously.

However, some of the other fxstreet.com/economic-calendar" data-fxs-autoanchor="">economic indicators suggest that the RBNZ could extend the pause. Non-tradable inflation continues to be a concern for the central bank, as domestic inflation remains stubbornly high. Non-tradeable inflation was 5.4% in the year to the June quarter, declining from the 5.8% print in the second quarter, although still above the 5.0% level.

The country’s labor market still showed some signs of tightness after the Employment Change rebounded by 0.4% in the second quarter, up from a 0.2% decline in Q1 and way above the market estimate of a 0.2% fall. The Unemployment Rate rose from 4.4% to 4.6%, lower than the expected 4.7% figure.

Additionally, New Zealand’s ANZ Business Confidence Index jumped to 27.1 in July from 6.1 in June, showing improving firms’ morale.

As the market remains split on the likely RBNZ policy move this week, traders will pay close attention to the language of the Monetary Policy Statement (MPS) and the updated economic projections for fresh hints on the bank’s outlook on interest rates.

How will the RBNZ interest decision impact the New Zealand Dollar?

The main focus will be on the RBNZ’s OCR forecasts and a downward revision to it for this year could reverberate the market's expectations of a rate cut by the RBNZ earlier than previously projected in the third quarter of 2025. The RBNZ currently forecasts the OCR to peak at 5.65% in Q4 2024.

The New Zealand Dollar (NZD) will be thrown under the bus if the central bank cuts the rate by 25 bps to 5.25% while revising down its OCR forecast for 2024. In such a scenario, NZD/USD could revisit the nine-month low of 0.5900.

In case the central bank holds the rate, any dovish tweak in the policy statement and a potential downward revision to the OCR projections could overshadow and act as a headwind for the Kiwi Dollar.

NZD/USD could extend its recovery momentum only if the MPS expresses concerns over sticky non-tradeable goods and services inflation and acknowledges upside risks to inflation, delivering a hawkish hold outcome. The New Zealand Dollar could also benefit should the bank retain its hawkish bias while maintaining the OCR estimates.

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

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