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

• The Reserve Bank of New Zealand is widely anticipated to maintain the OCR at 5.50%
• The language in the policy statement is expected to remain hawkish.
• The New Zealand Dollar has room to extend its bullish momentum against the US Dollar. 

The Reserve Bank of New Zealand (RBNZ) will announce its monetary policy decision on Wednesday at 02:00 GMT and is widely expected to maintain the Official Cash Rate (OCR) at 5.50%.

Ahead of the announcement, the New Zealand Dollar (NZD) trades around the 0.6100 threshold against the United States Dollar (USD), consolidating last week's gains that drove NZD/USD to its highest level since mid-March.

What to expect from the RBNZ interest rate decision?       

Market participants anticipate an on-hold decision, but given that the RBNZ holds monetary policy meetings only seven times per year, each announcement could vary from the previous and trigger sharp market reactions. 

New Zealand policymakers look at quarterly inflation and employment data, and the latest available figures showed New Zealand's Consumer Price Index (CPI) increased 4.0% in the 12 months to the March 2024 quarter, according to figures released by Stats NZ, following a 4.7%  increase in the 12 months to the December 2023 quarter. It was the lowest reading since the second quarter of 2021, although inflation held above the central bank’s goal of keeping it within 1% to 3%.

Regarding employment, March quarter data from Stats NZ showed the unemployment rate surged to 4.3% from 4% in the previous quarter, while the seasonally adjusted number of unemployed people rose to 134,000 (up 10,000) over the quarter. As it happens with other major economies, the labor market gave tepid signs of loosening, which are still far away from enough to abandon the tight monetary policy. 

The central bank releases a Monetary Policy Review three times per year, the latest published in April 2024 and the next in mid-July, meaning the focus will be on the statement and any relevant change to the wording. Investors will pay close attention to Governor Adrian Orr's words, who previously noted that the local economy evolved broadly as anticipated by the committee, adding “core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced.” However, he also added that with headline inflation above the central bank’s target band, the Committee has limited ability to “tolerate upside inflation surprises.” 

With that in mind, policymakers are widely anticipated to maintain the hawkish tilt, as they have little room to manoeuvre. As a result, the NZD/USD could jump to fresh multi-month highs. 

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

The NZD/USD pair is undergoing a bearish correction, but the overall stance is bullish amid the broad US Dollar’s weakness. The Greenback has been on the back foot ever since market participants finally understood that the Federal Reserve (Fed) will maintain interest rates at record highs for most of 2024. 

Valeria Bednarik, FXStreet’s Chief Analyst, says: “NZD/USD has room to extend gains beyond the recent multi-month high at 0.6146, facing the next hurdle in the 0.6170 price zone, as the daily chart shows multiple relevant highs and lows in the area.  The pair can rally with no actual impact of the Committee’s wording, seen as hawkish, as previously noted. On the contrary, a dovish tilt could force NZD/USD to extend its bearish correction, with strong static support in the 0.6050 region.”

Bednarik adds: “Technical readings in the daily chart support the bullish case. NZD/USD develops above all its key moving averages, with the 20 Simple Moving Average (SMA) firmly advancing below the longer ones. A mildly bearish 100 SMA provides interim support around 0.6070 en route to the stronger one previously mentioned. Finally, technical indicators have barely retreated from near overbought levels, lacking downward strength, usually a sign of absent selling interest.”