RBNZ set for another 50 bps interest rate cut amid easing inflation and slowing economic activity
- The Reserve Bank of New Zealand is set to lower its key interest rate by 50 bps to 4.25% on Wednesday.
- The RBNZ is expected to front-load due to the economic recession and as inflation falls back into the target band.
- The New Zealand Dollar could see a big reaction to the RBNZ’s updated forecasts and Governor Orr’s press conference.
The Reserve Bank of New Zealand (RBNZ) will announce its interest rate decision on Wednesday at 01:00 GMT. The central bank is widely expected to cut the Official Cash Rate (OCR) by another 50 basis points (bps) from 4.75% to 4.25%.
A Reuters poll of 30 economists found 27 favoring a 50 bps rate reduction at the November policy meeting. The RBNZ cut the OCR by 25 bps during its August meeting and implemented an additional 50 bps reduction in October.
What to expect from the RBNZ interest rate decision?
Economists expect the RBNZ to front-load rate cuts due to the gloomy economic outlook and as inflation falls back into the central bank’s target range between 1% and 3%.
New Zealand’s economy skirted another recession after Gross Domestic Product (GDP) declined 0.2% in the second quarter (Q2) from the previous quarter’s revised 0.1% growth. Economists expected a 0.4% contraction in the reported period, while the RBNZ projected a 0.5% drop.
Meanwhile, NZ Stats showed on October 16 that New Zealand’s annual Consumer Price Index (CPI) rose 2.2% in Q3, aligning with market forecasts and marking a sharp slowdown from the 3.3% growth in Q2.
By front-loading, the RBNZ can move into less restrictive territory, alleviating the pressures of higher borrowing costs on households and businesses. Following its October meeting, the central bank said in the policy statement that “economic activity in New Zealand is subdued, in part due to restrictive monetary policy.”
With a 50 bps rate cut fully priced in, markets will pay close attention to the language of the Monetary Policy Statement (MPS) and the updated economic projections for fresh signals on future rate reductions.
How will the RBNZ interest decision impact the New Zealand Dollar?
Another downward revision to the OCR in the updated projections for this year and the next could reaffirm dovish expectations. The RBNZ currently forecasts the OCR at 4.92% in Q4 2024.
In this case, the New Zealand Dollar (NZD) will come under intense selling pressure, with sellers targeting levels unseen since November 2022 around 0.5750
The NZD could rally hard if the RBNZ surprises with a 25 bps rate cut or maintains the OCR forecasts. The NZD/USD could regain 0.5900 and beyond on an unexpected hawkish move.
Dhwani Mehta, FXStreet’s Senior Analyst, offers a brief technical outlook for trading the New Zealand Dollar on the RBNZ policy announcements: “The downside risks remain intact for the NZD/USD after a Death Cross was confirmed on the daily chart last Friday. Adding credence to the bearishness, the 14-day Relative Strength Index (RSI) stays vulnerable below the 50 level.”
“If buyers defy bearish pressures, the initial resistance is seen at the 21-day Simple Moving Average (SMA) at 0.5920, above which the 0.6000 round level will be tested. Further up, the confluence zone of the 50-day SMA, 100-day SMA and 200-day SMA near 0.6060 will be a tough nut to crack for them. Alternatively, failure to defend the October 2023 low of 0.5772 will threaten the November 2022 low of 0.5741,” Dhwani adds.
Economic Indicator
RBNZ Interest Rate Decision
The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after its seven scheduled annual policy meetings. If the RBNZ is hawkish and sees inflationary pressures rising, it raises the Official Cash Rate (OCR) to bring inflation down. This is positive for the New Zealand Dollar (NZD) since higher interest rates attract more capital inflows. Likewise, if it reaches the view that inflation is too low it lowers the OCR, which tends to weaken NZD.
Read more.Next release: Wed Nov 27, 2024 01:00
Frequency: Irregular
Consensus: 4.25%
Previous: 4.75%
Source: Reserve Bank of New Zealand
The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by Governor Adrian Orr’s press conference.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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