The RBNZ meeting on Wednesday is likely to trigger a market reaction, regardless of the outcome, given the high level of uncertainty. The Reserve Bank is dealing with a complicated situation in New Zealand, which makes it hard for analysts to forecast exactly what it will do. As a result, traders are having difficulty pricing in a rate hike trajectory, which means the market will likely have to react in real time to what happens at the meeting.
Overall, the market expects rates to trend higher amid inflationary pressures. The issue is that energy prices are seen as the main driver of future consumer prices, and the unsteady resumption of transit in the Strait of Hormuz makes that uncertain. After a close vote split at the last meeting, traders are looking for a close split at the upcoming meeting, as the central bank tries to keep all options on the table.
What the Market is Looking For
Futures are pricing around a 50-50 chance of a rate hike (with a slight bias towards tightening). This means the currency could weaken if the RBNZ fails to deliver, but could also strengthen if rates are increased. Both outcomes could be significantly mitigated by the rhetoric in the accompanying statement and the split vote. It’s also highly likely there will be a larger move immediately after the news, which will fade fairly quickly as investors get more details.
At the last meeting, the vote was 3-3 between a hike and a hold, with Governor Anna Breman using her tie-breaking vote for the first time ever to secure a hold. Investors are likely looking at a similar scenario this time around, with the same vote split. Instead, analysts are suggesting that Breman will vote to hike. If not, then the expectation is that she will deliver hawkish rhetoric that will all but guarantee a rate hike at the next meeting. This is the most expected outcome and is likely to have the least impact on the currency.
How the Markets Might React to the RBNZ Decision
Given the hawkish bias in the expectations, a dovish result is the most likely to be a bigger surprise. It is unlikely, but possible that the vote will be an even split, with the RBNZ taking a more “hedging” position about inflation, implying a wait-and-see attitude. Or the vote could be with a majority in favour of holding. These options are most likely to cause a large swing in the currency.
Comparatively, a hawkish surprise is likely to be less significant, given that it aligns with the market’s direction. A clear majority vote in favour of a hike, followed by rhetoric suggesting more tightening on the way, would surprise the market and likely support the NZD. But the magnitude of the surprise is likely to be smaller, capping the upside.
Going Beyond the Meeting
Ahead of the RBNZ decision, the shadow MPC vote was split 3-3, indicating a hawkish hold and affirming the market’s outlook. The RNBZ is expected to hike interest rates at least twice this year, the first either at this meeting or the next, and the second in December. Therefore, the market is generally in agreement about hikes, but the currency could fluctuate depending on the timing.
However, softness in the NZ economy, coupled with external factors being the main driver of inflation, could leave the RBNZ more dovish than the market is interpreting. This is the first Reserve Bank meeting since the (interrupted) reopening of the Strait of Hormuz and the return of crude prices to pre-war levels. Given the uncertainty around energy prices later this year, the central bank might want to keep its options open.
