New Zealand Dollar Weakens After Inflation Bolsters RBNZ's Case for Another 50bp Cut
- Written by: Gary Howes
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The New Zealand Dollar fell following data that confirms the Reserve Bank of New Zealand (RBNZ) has ample scope to cut by 50 basis points in February.
Domestic inflation data largely met expectations, suggesting the RBNZ can maintain focus on trying to boost the economy and lift it out of a multi-month period of stagnation.
New Zealand's headline CPI inflation rate remained at 2.2% y/y in the final quarter of 2024 said StatsNZ, which slightly exceeded expectations for a drop to 2.1%. On a quarterly basis, the 0.5% advance in prices met expectations but represented a slowdown from Q3's 0.6%.
"This is the second consecutive quarter that the annual inflation rate has been within the Reserve Bank of New Zealand's target band of 1 to 3 percent," said Nicola Growden at StatsNZ.
The RBNZ might have expected more progress, having pencilled a fall to 0.4% into its forecasts.
However, the modest upside surprise was driven entirely by the volatile tradables component, and economists say this is not something the RBNZ will be concerned about.
"With price pressures continuing to abate, the RBNZ should have no qualms about cutting rates by another 50bp at its meeting next month," says Abhijit Surya, Australia and New Zealand Economist at Capital Economics.
Following the data, the Pound to New Zealand Dollar exchange rate recovered to 2.18 from 2.1750. The U.S. Dollar-New Zealand Dollar rate dropped from 0.5680 to 0.85650.
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"Weak data, weaker Kiwi. This data is crucial for the RBNZ and the direction of the OCR," says David Croy, an analyst at ANZ Bank.
The New Zealand Dollar underperformed most G10 peers in 2024, partly thanks to the RBNZ aggressively cutting interest rates.
Further rate cuts in 2025 can keep a lid on the currency's recovery potential and could even see the currency fall to the lows seen in late 2024 over the course of the coming weeks.
Satish Ranchhod, Senior Economist at Westpac NZ, says these data suggest price and cost pressures have been cooling in parts of the domestic economy that are sensitive to the high level of interest rates in recent years.
"Overall inflation is close to 2%, and both core and domestic inflation are easing. In addition, economic activity was softer than expected through the latter part of last year. Against that backdrop, we expect that the RBNZ will deliver another 50bp cut when they next meet in February," he says.
