New Zealand Dollar: RBNZ to "Pull a Fed" Says CACIB

Above: File image of RBNZ Governor Adrian Orr at a press conference. Image courtesy of RBNZ.

The Reserve Bank of New Zealand (RBNZ) could "pull a Fed" in more ways than one on Wednesday when it releases its OCR decision, as well as MPS with a new set of forecasts.

This is according to a new analysis from Crédit Agricole's investment bank, which thinks there is significant space for the RBNZ to disappoint the market and "support the NZD".

The call comes ahead of the midweek RBNZ decision on interest rates, where markets see a 90% probability of a 50 basis point move.

"The RBNZ does not have much to go on to make its decision tomorrow, but NZ survey and high frequency data suggest that consumption and investment remained weak in Q3 and that the economy potentially slipped back into recession, its third in four years," says David Forrester, a currency strategist at Crédit Agricole.

He explains that the Federal Reserve's decision to cut rates by 50bp in September, when combined with easing domestic inflation pressures, gives the RBNZ room to deliver a jumbo-sized 50bp rate cut.

"The Fed’s rate cut has eased some downward pressure on the NZ TWI and, therefore, import prices," he explains. The TWI is the Trade Weighted Index - a measure of broader NZ Dollar value.

A stronger NZD lowers import costs, which helps in the fight against inflation.

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"Importantly, pricing pressures are coming off sharply with low levels of businesses raising prices in Q3 and intending to raise prices in the coming three months. Weak local demand means businesses lack pricing power. While mortgage rates have dropped due to local banks front-running of RBNZ rate cuts, the local housing market’s recovery is modest," says Forrester.

With the market nearly fully priced for a 50bp cut, the decision itself shouldn't result in a significant currency reaction.

Instead, Forrester says the focus will be on Governor Adrian Orr’s rhetoric as well as the central bank’s OCR forecast path in its MPS.

"On this front, the RBNZ could also pull a Fed and disappoint the market with its measured dovishness. The rates market has the OCR falling by over 200bp by August 2025 vs the RBNZ’s forecast for the rate to fall by about 150bp over the same period," says Forrester.

"So there is significant room for the RBNZ to disappoint," he adds.