RBNZ - Reserve Bank of New Zealand

11-AUG-2024

The RBNZ is to hold a policy meeting next week where there are mixed views regarding the Official Cash Rate with 19 out of 31 economists surveyed by Reuters expecting rates to be kept unchanged at 5.50% and 12 are forecasting a 25bps cut, while money markets have recently shifted to pricing greater chances of a cut following softer inflation expectations with OIS pointing to an 84% probability for a reduction and just a 16% chance for rates to be maintained at the current level. As a reminder, the RBNZ kept the Official Cash Rate unchanged at the last meeting as unanimously expected, while it maintained its rhetoric that the Committee agreed the OCR will need to remain restrictive but provided a dovish tilt in which it stated that the extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures. The RBNZ also commented that some domestically generated price pressures remain strong although there are signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions, while it also stated that current and expected government spending will restrain overall spending in the economy. Furthermore, the minutes from the meeting revealed that the Committee is confident inflation will return to within its 1%-3% target range over the second half of 2024 and that the appropriate stance of monetary policy was discussed at the meeting. There haven't been many updates from the RBNZ since the last meeting, while the recent data had mostly supported the case for a continued pause including New Zealand CPI Y/Y for Q2 which softened to 3.3% vs. Exp. 3.4% (Prev. 4.0%) but remained above the target range, while employment data in Q2 beat estimates with surprise jobs growth of 0.4% (Exp. -0.2%) and the Unemployment Rate was less than feared at 4.6% vs. Exp. 4.7% (Prev. 4.3%) despite an unexpected increase in the Participation Rate to 71.7% vs. Exp. 71.3% (Prev. 71.5%). Labour Cost Index was also firmer than expected during the previous quarter with QQ growth at 0.9% vs. Exp. 0.8% (Prev. 0.8%) and Y/Y growth at 3.6% vs. Exp. 3.5% (Prev. 3.8%) which could compel policymakers to remain patient to avoid stoking inflationary pressures. However, the recent release of softer inflation expectations resulted in a shift in market pricing which is now heavily leaning towards a cut.