New Zealand Dollar Tipped for a RBNZ Boost

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There is a decent chance the Reserve Bank of New Zealand's midweek policy update boosts the New Zealand Dollar, according to a new analysis.

David Forrester, Senior FX Strategist at Crédit Agricole, says the RBNZ could disappoint those expecting an interest rate cut to be delivered as soon as October.

"The RBNZ meeting and MPS on Wednesday could turn out to be a volatile affair," says Forrester. He notes money market pricing shows nearly two 25bp rate cuts are expected by investors by year-end, with a first move fully priced by October.

"There is risk of the RBNZ disappointing this market pricing and giving the NZD a boost," says Forrester.

The NZD is one of the better-performing major currencies of the past month, boosted by a supportive global backdrop as investors rejuvenate hopes that the Federal Reserve will cut interest rates in September.

By contrast, the RBNZ is expected to cut interest rates after the Fed and other major central banks, offering NZD a relative interest rate yield advantage.

Yet, the New Zealand economy is straining under the weight of the RBNZ's interest rate hikes, having entered a double-dip recession in 2023. Activity picked up in early 2024, but Crédit Agricole notes surveys have gone into retreat recently, pointing to another soft patch in growth.

Employment growth has weakened and the unemployment rate has hit nearly a three-year high at 4.3%. "While such outcomes imply a shift to an easing bias by the RBNZ, this is very unlikely," says Forrester.

The obvious brake to rate cuts is New Zealand's inflation rate, which runs at 4% year-on-year, which is above the RBNZ’s 1-3% target band.

"The central bank's preferred measure of inflation, its sectoral factor model inflation, is running at 4.3% YoY. Wages growth has shown only modest moderation and at 4.2% YoY still implies above-target core inflation given NZ’s weak productivity growth," says Forrester.

But there is some "good news for the RBNZ," adds the analyst, as the RBNZ's preferred measure of inflation expectations, the 2Y-ahead expectations of corporates, has continued to fall and at 2.33% is modestly above the centre of its 1-3% target band.

Crédit Agricole expects the RBNZ to drop reference to future rate hikes as a result of the positives and slowing economy, but still-high inflation should see the Bank say interest rates will stay at current levels for a "sustained period... disappointing this market pricing and giving the NZD a boost."