New Zealand Dollar's Slide Arrested: Inflation Reading Lowers Odds of RBNZ Rate Cut

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The New Zealand Dollar is defending the strong gains made on Tuesday, helped by an inflation reading that suggests the Reserve Bank of New Zealand (RBNZ) could have to wait until August before cutting interest rates.

The odds of an RBNZ rate cut happening before the middle of the year fell after New Zealand reported some above-consensus inflation figures.

Statistics New Zealand said annual inflation fell to 4.7% in the year to the Q4 2023, down from Q3's 5.6% and matching consensus expectations.

The quarter-on-quarter figures stood at 0.5%, down on the previous quarter's 1.8% and in line with consensus. However, non‑tradable inflation came in at 1.1% q/q, which is more than both the RBNZ and the market had expected.

Non-tradable inflation is similar in nature to the core measures of inflation that we are used to in the UK and other comparable countries and speaks of solid domestic inflationary pressures.

Often it is this type of inflation that concerns central banks. Indeed, market pricing for a May rate cut at the RBNZ retreated from about 80% to 60% following the inflation release.

This is typically associated with currency strength: "NZD/USD briefly popped up to 0.6100 following the release of New Zealand’s Q4 2023 CPI," says Carol Kong, a strategist at Commonwealth Bank.

"The RBNZ will maintain its restrictive monetary policy until it is confident inflation will settle in the 1%‑3% target range," says Kong.

Analysts at New Zealand lender ASB now expect the first RBNZ rate cut in August but say the risks are skewed to a later start.

For the New Zealand Dollar, the inflation reading appears to be enough to defend the solid China-inspired gains of the previous day.

The New Zealnd Dollar-U.S. Dollar exchange rate is at 0.6108 with the previous day's low 0.6062.

The Pound to New Zealand Dollar exchange rate is quoted at 2.0806; the previous day's high was 2.0945. The Euro to New Zealand Dollar is at 1.7788; the previous day's high is at 1.7935.

Above: Annual inflation in New Zealand, source: StatsNZ.

These domestic figures, combined with news that China is looking at ways to boost its domestic stock market, could be enough to temporarily arrest the slide the NZ Dollar has experienced at the start of 2024.

"Inflation in New Zealand has been stubbornly high, but the central bank has responded to this with an austere monetary policy. It is entirely probable that New Zealand’s policy rate will stay at a slightly higher level than other central banks," says Tommy von Brömsen, an analyst at Handelsbanken.

Handelsbanken says buying the New Zealand Dollar forms a "Trade of the Year", arguing that falling global interest rates and steady domestic rates will boost the currency.

Any delay to the RBNZ's rate cuts will contribute "to good carry" (interest rate differential), says von Bromsen, offering NZD support.

"At the same time, the currency will strengthen as interest rates fall around the globe and overall uncertainty decreases," he adds.