What to expect from the RBNZ interest rate decision?

The Reserve Bank of New Zealand will publish its first Monetary Policy Statement (MPS) of this year, including the updated economic forecasts, alongside the interest rate announcement on Wednesday at 01:00 GMT. RBNZ Governor Adrian Orr’s press conference will follow at 02:00 GMT.

Data published by Stats NZ showed that New Zealand’s annual Consumer Price Index (CPI) increased by 4.7% for the December quarter, the smallest annual rise in more than two years. However, the figure was still above the RBNZ's target of 1.0%-3.0%.

Despite the CPI data indicating disinflationary conditions in New Zealand’s economy, the Australian and New Zealand Banking Group (ANZ) revised their rate call earlier this month, noting that “we now expect the RBNZ to hike the OCR 25 basis points (bps) in February and April, taking it to 6.0%.”

“We just don’t think the RBNZ will feel confident they’ve done enough to meet their inflation mandate,” the ANZ said.

However, the country’s falling inflation expectations nudged markets to reprice their expectations for the RBNZ interest rate outlook. Two-year inflation expectations, seen as the timeframe when RBNZ policy action will filter through to prices, fell to 2.5% from 2.76% in the December quarter, the central bank’s quarterly survey showed.

Further, Stats NZ's Selected Prices Indexes (SPI) showed that the annual increase in inflation actually fell to 6.8% in January from 7.0% in December.

At its November policy meeting, the RBNZ said that “if inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further,” adding that “the Monetary Policy Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time.” The central bank projected a peak OCR of 5.69% in the September quarter of 2024, leaving the door ajar for one more rate hike this year.

Previewing the RBNZ policy announcement, analysts at BBH noted: “Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.50%. It will release its Monetary Policy Statement with updated macro forecasts at the same time. Markets see around 25% odds of a 25 bp hike this week and the focus will be on the updated rate path projections.”

“We doubt the revised RBNZ projections will rule out an additional policy rate increase because of stronger than expected non-tradable inflation and private sector wage growth in Q4. As such, NZD risks are skewed to the upside,” the analysts added.