RBNZ expected to keep key interest rate on hold as inflation pressures persist

• The Reserve Bank of New Zealand is expected to keep rates on hold at 5.50% on Wednesday.
• Upside risks to inflation to offset economic concerns, prompting RBNZ to delay any dovish shifts.
• The New Zealand Dollar gears up for intense volatility on the RBNZ policy announcements.

Following its July monetary policy meeting on Wednesday, the Reserve Bank of New Zealand (RBNZ) is set to hold the Official Cash Rate (OCR) at 5.50%, extending the pause into an eighth meeting in a row.

It’s expected to be a straightforward event, with no press conference from RBNZ Governor Adrian Orr and the release of updated economic projections. However, any changes to the RBNZ’s communication could spark a big reaction in the New Zealand Dollar (NZD).

What to expect from the RBNZ interest rate decision?       

With discouraging economic performance alongside the persistence of inflation risks, a rates on-hold decision by the RBNZ is widely anticipated by market participants. Therefore, they will look for fresh hints on the timing of the dovish policy pivot in the central bank’s Monetary Policy Statement (MPS).

New Zealand’s annual Consumer Price Index (CPI) increased by 4% in the first quarter, according to data released by Stats NZ, following a 4.7% growth in the 12 months to the December 2023 quarter.

Even though there was progress in disinflation, the non-tradable inflation remained a cause for concern. Non-tradeable inflation was 5.8% in the year to the March quarter, a tad lower than the 5.9% figure seen in the final quarter of 2023.

Meanwhile, Stats NZ showed on June 19 a 0.2% increase in GDP in the first quarter, breaking a streak of quarterly GDP declines that had led to the country's recession in the second half of 2023.

These data sets are likely to support potential delays in the dovish changes to the policy statement's language, despite some analysts arguing against them amidst declining domestic consumer confidence and the deepening contraction in the manufacturing and services sectors.

ANZ - Roy Morgan New Zealand Consumer Confidence fell to 83.0 in June from the previous month's 84.9, sticking close to multi-year lows in the sentiment index. The Business NZ Performance of Services Index (PSI) dropped to 43.0 in May from April’s 46.6 while the Business NZ Performance of Manufacturing Index (PMI) contracted to 47.2 in May, following a 48.8 figure in April.

Previewing the RBNZ policy announcement, analysts at TD Securities noted: “While there are signs of cracks in the economy (e.g., labor market easing, contractionary PMIs), we don't think the RBNZ is in any urgency to ease given the upside risks to inflation, especially from services.”

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

The NZD/USD pair is on the front foot heading into the RBNZ showdown on Wednesday, in the aftermath of the US Dollar (USD) demise induced by Friday’s US labor market data for June. The downward revisions to the April and May employment data prompted investors to ramp up bets that the US Federal Reserve (Fed) will lower interest rates in September.

Furthermore, expectations that the RBNZ will refrain from making any dovish tweaks before the July 16 second-quarter inflation report, help the pair maintain its recent upswing.

“Market has more than fully priced in a November rate cut, with 60% odds of an earlier cut in October,” per BBH Analysts.

If the MPS remains wary of the upside risks to inflation, in the face of sticky non-tradeable goods and services inflation alongside the May Budget release, the Kiwi Dollar could see a fresh leg higher to the June high of 0.6222. On the other hand, NZD/USD is seen falling back toward 0.6000 should the RBNZ do away with its hawkish guidance, hinting at a policy pivot later this year.

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, deriving strength from a bullish 14-day Relative Strength Index (RSI) on the daily time frame.”

“The next bullish target for the Kiwi is seen at the June high of 0.6222, above which the 0.6250 psychological level will challenged. Further up, the 0.6300 threshold will be in sight. Alternatively, a failure to defend the confluence of 100-day and 200-day SMAs at 0.6070 could open the downside toward the 0.6000 level,” Dhwani adds.