At its meeting on Wednesday, the Reserve Bank of New Zealand is widely expected to raise the Official Cash Rate by 50 basis points taking the cash rate to 2.50%. It will be the RBNZ’s third straight 50bp hike in a row, in a tightening cycle that started back in October.
At its last meeting in May, the RBNZ upped the ante on its hawkish forward guidance by raising its forecast for the terminal rate to a 3.9% peak by mid-2023 (from 3.35%). It also stressed a “commitment to ensure consumer price inflation returns to within the 1 to 3 percent target range”
Inflation is currently many miles way from the RBNZ’s target range, sitting at a 30-year high of 6.9%. It is expected to rise further to 7.1% in the June quarter (released next Monday the 18th of July). The RBNZ will remain hawkish until it sees firm evidence that inflation has turned lower.
To that effect, there is evidence that the RBNZs tightening cycle is having an impact. Consumer and business confidence has plunged against a backdrop of households facing higher mortgage repayments. The housing market has continued to cool.
However, the labour market remains tight which feeds into wages and inflation data and as such the RBNZ will reiterate the need to take policy into restrictive territory while reminding that it is data dependent.
Turning to the currency, the NZD/USD finished last week below .6200c for the first time in twenty-five months. The cause of the NZD/USD’S fall in recent months has been global recession fears, and a hawkish Fed, both of which have been behind the surging US dollar.
In the short term, the NZD/USD has found some support at .6120c and should the release of U.S CPI data on Wednesday again spark talk of peak inflation there is scope for the NZDUSD to rally back towards .6350c.
However, should the NZD/USD fail to hold onto the support at .6120, the next downside level is the psychologically important .6000c level.