The Reserve Bank of New Zealand (RBNZ) is expected to keep the Official Cash Rate (OCR) unchanged at 5.50% in its upcoming monetary policy review. The central bank’s decision to maintain rates follows its stance in the May Monetary Policy Statement, where it signaled that no further increases in the OCR would be necessary at this time.
In the May statement, the RBNZ emphasized that there was no need to expect any cuts to the OCR for the foreseeable future. Their projections indicated that the first easing in policy would likely not occur until late next year. Since then, the data flow has provided reassurance to the RBNZ that their current stance is appropriate, at least for now.
One key piece of information was the release of the March quarter GDP, which was slightly weaker than the RBNZ’s forecasts but close to Westpac’s own projections. This suggests that the economy started the year in a slightly less overheated position than initially anticipated. Given the RBNZ’s strong on-hold stance, this data alone is likely to be sufficient to keep rates unchanged in the upcoming review.
However, recent developments paint a mixed picture of the risks for inflation and future interest rates. Some downside risks are emerging from the weaker-than-expected bounce back of the Chinese economy, which has implications for export demand. In response to this, Westpac revised down its forecast of the farmgate milk price in June. Additionally, many indicators of domestic demand indicate a cooling economy, such as the retail and construction sectors evolving as expected with the previous interest rate increases. The corporate tax take is also weakening.
On the other hand, global central banks have generally found inflation to be more resilient than anticipated and have adjusted their view of the likely peak in policy rates. The RBNZ will be cautious not to repeat the mistake of prematurely ending the tightening cycle and having to reverse its decision if the economy and inflation prove to be more robust. Some domestic indicators, like the labor market and consumer and business confidence, suggest lingering economic resilience. Jobs growth is still outpacing population increases, and confidence seems to have found a base. The housing market has also stabilized sooner than anticipated. Market pricing still reflects a potential further increase in the OCR this year, with Westpac maintaining its call for a 25-point increase in August.
The RBNZ’s commentary accompanying the on-hold stance is expected to be brief, as saying too much might lead to misinterpretation and incorrect market pricing. The main message is expected to be that the future direction of interest rates is data-dependent, allowing room for the RBNZ to adjust its position if upside or downside risks to inflation accumulate. This message might have been somewhat overshadowed in the May statement.
In summary, the RBNZ is likely to keep the OCR unchanged at 5.50% in its upcoming monetary policy review. The data flow since May has provided comfort that the on-hold stance is appropriate for now. However, mixed developments in the global and domestic markets indicate potential risks to inflation and interest rates. The RBNZ’s commentary is expected to emphasize a data-dependent approach, allowing flexibility in response to evolving economic conditions.
