What to expect from the RBNZ interest rate decision?

As a rates on-hold decision is fully priced in, markets will closely scrutinize the language and the tone in the Reserve Bank of New Zealand’s Monetary Policy Statement (MPS).

After extending the pause in February, the RBNZ policy statement stated, “conditional on our central economic outlook, we expect the OCR will need to remain around current levels for an extended period for the Monetary Policy Committee to meet its inflation target.”

Speaking at the post-policy meeting press conference, Reserve Bank of New Zealand’s (RBNZ) Governor Adrian Orr noted that “we did discuss a hike in rates”, adding that there was a “strong consensus that rates were sufficient.”

Orr said that he is “still concerned about underlying inflation, how grown inflation is easing.”

Since the February meeting, little data of note has been released from New Zealand to help gauge the timing of the RBNZ’s likely policy pivot. However, with New Zealand’s economy facing its second recession in 18 months and consumer confidence dipping sharply, markets may not be surprised by a dovish hold.

New Zealand’s Gross Domestic Product (GDP) growth contracted 0.1% in the fourth quarter of 2023, following a 0.3% contraction in the third quarter. Meanwhile, ANZ-Roy Morgan New Zealand Consumer Confidence fell by 8.1 points in March to 86.4.

Markets are currently pricing in the first RBNZ’s rate cut in August, with a 75 bps of total easing this year, per BBH Analysts.

On the other hand, the RBNZ could stick to its language from the February MPS, awaiting the first-quarter Consumer Price Index (CPI) report and the labor market data before contemplating any change in its policy outlook.

Data published by Stats NZ showed that New Zealand’s annual Consumer Price Index (CPI) increased by 4.7% for the December quarter, the smallest annual rise in more than two years. However, the figure still remains much above the RBNZ target of 1.0%-3.0%.

Previewing the RBNZ policy announcement, analysts at TD Securities noted: “The RBNZ is expected to keep the OCR on hold at 5.50%. Limited data flow since the February MPS suggests the Bank delivers a similarly worded Statement again.”

“GDP released a week after the February MPS missed the Bank's forecast by a whisker but higher oil prices, weaker NZD, monthly survey releases with price and employment data suggest the inflation outlook still looks challenging,” the analysts added.