The Reserve Bank of New Zealand decided to keep its cash rate on hold at 5.5%, as most people expected. After the announcement, the NZD/USD dropped, hinting at a potential rate cut in the near future. The market is now pricing in a 25bp rate cut for October, up from 16bp before the RBNZ statement. According to Westpac, the RBNZ statement was “less hawkish” compared to the one in May, and BNZ is now forecasting a rate cut in November, moving it up from February.
ANZ is closely watching the inflation data that is set to be released next week in New Zealand. The bank noted that while the RBNZ’s commentary had similarities to May, it also acknowledged the recent weaker indicator data. The Committee discussed the risk that tight monetary policy might be impacting domestic demand more than expected. ANZ had previously predicted the first rate cut to come in February, but now they believe it might happen as early as November, depending on the data from the CPI report next week.
Financial markets reacted quickly to the RBNZ statement, with the 2yr swap rate dropping by 18bp and the NZD falling by half a cent within an hour. ANZ believes that the market’s response was understandable, given the dovish tone of the press release and meeting record. While some are calling it a “pivot” towards a more dovish stance, ANZ believes that the Committee still sees balanced risks around inflation and is cautious about the impact of tax cuts. However, the market sentiment remains bearish, focusing on the dovish aspects of the statement and pushing rates lower.
Looking ahead, the NZ inflation report is scheduled to be released on Wednesday morning, July 17, New Zealand time. This translates to Tuesday at 2245 GMT and 1645 US Eastern time. The outcome of this report will be crucial in determining the future path of the OCR and whether a rate cut will indeed happen in November as some are predicting. Investors will be paying close attention to the data to see if it supports the recent dovish shift in the RBNZ’s stance.