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RBNZ June Interest Rate Preview

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Will higher oil prices change near-term inflation outlook for the RBNZ or with the Fed most likely to stand pat on policy; has the risk of an RBNZ rate cut increased?

The Reserve Bank of New Zealand will be meeting later this evening for its monthly monetary policy meeting. Economists expect that the RBNZ could hold rates steady at today’s meeting, leaving the OCR rate at 2.25% (although previously expectations were calling for a 25bps rate cut).

Time Event Consensus Previous
22:00 RBNZ OCR Rate 2.25% 2.25%
22:00 Monetary Policy Statement
22:00 RBNZ Press Conference

At the March meeting, the RBNZ signaled that further rate cuts were necessary, a policy response to subdued inflation growth. While the uncertainty that prevailed when the RBNZ released its monetary policy outlook in March was much higher than now, the relatively calm environment has seen funding costs turning lower. More importantly, since the March release of the MPS, oil prices have continued to rise steadily which could translate into near-term inflation outlook turning higher. The New Zealand government also released its latest budget and announced plans for fiscal spending with infrastructure spending on construction likely to add to inflation pressures. Construction activity continues to remain high with the first quarter showing an increase of 5.30% which could most likely add to the upside on the first quarter GDP.

The budget also saw tax increases on excise rates on tobacco over the next four years which is another factor that could boost inflation outlook.

After cutting rates to 2.25% in March, the RBNZ has been plagued by the strength in the housing markets with prices rising in many parts of the country at a rapid pace while the inventory of homes continues to fall.

[Tweet “Quarterly unemployment rate edged higher to 5.70%, employment increased 1.20%”]

Economic data from New Zealand since the April RBNZ meeting has been broadly positive. While the quarterly unemployment rate edged higher to 5.70%, the quarterly change in employment increased 1.20%, despite some weakness in hourly earnings. Post the RBNZ meeting, New Zealand first quarter GDP data will be released including trade balance numbers. The RBNZ’s next meeting is scheduled for August, which by then the central bank will have enough data including the second quarter employment and inflation data.

While today’s interest rate decision will be a close call, there are enough reasons for the RBNZ to hold rates steady while keeping the easing bias open. Should the RBNZ maintain interest rates steady today, there is a good chance that the statement could turn to be dovish with the possibility of talking down the NZD exchange rate which has been rising steadily and is currently up 2.68% since the April 27th meeting.

However, with that said, should the RBNZ cut rates at today’s meeting, the Kiwi could see some strong downside risk. NZDUSD is facing a technical resistance near 0.7042 – 0.701, while to the downside, support at 0.683 – 0.685 will be in focus.

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