New Zealands RBNZ forecast to deliver second consecutive rate hike

The Reserve Bank of New Zealand (RBNZ) is on track to deliver a follow-through interest rate hike, raising the Official Cash Rate (OCR) by another 25 basis points (bps) from 2.50% to 2.75% on Wednesday.

Experts expect a consensus decision this week, unlike a deeply divided outcome predicted during the July monetary policy meeting.

The RBNZ interest rate announcement is due at 02:00 GMT, accompanied by the Monetary Policy Review (MPR), Monetary Policy Statement (MPS) and the Minutes of the meeting. Governor Anna Bremans press conference will follow at 03:00 GMT.

The New Zealand Dollar (NZD) is set to experience intense volatility as all eyes are on the Kiwi central banks signals on the monetary policy outlook, particularly amid an uncertain environment caused by the prolonged Middle East conflict.

Following Julys hawkish hike, the RBNZ said in its Monetary Policy Review (MPR) that “with inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2 percent target mid-point.”

The Minutes of the July meeting showed that “the committee agreed that while further OCR increases appear likely at upcoming meetings, their timing is highly uncertain.”

That leaves the upcoming September meeting as a ‘live’ one, with another rate hike fully baked in. Therefore, the main focus will be on whether Breman and company offer any hints on the likelihood of further tightening in October.

Additionally, the economic backdrop gives the RBNZ a reason to stay hawkish. Headline inflation was 4.1% year-on-year in the June quarter, exceeding the central bank's 3.9% forecast.

At the same time, inflation expectations have eased for the third quarter, and the labor market remains soft, with the Unemployment Rate rising to 5.6%. This creates a difficult balancing act, as inflation remains too high, with the recovery still fragile.

That said, the RBNZ updated projections, particularly the OCR forecast, will also be closely scrutinized for any signals on the scope and the timing of further rate increases.

Strategists at Brown Brothers Harriman note that the RBNZ is “widely expected to deliver a back-to-back 25bps Official Cash Rate (OCR) hike to 2.75%” at Wednesday‘s meeting, underpinned by “New Zealand headline inflation…above target” and an improved domestic growth outlook. They also look for the central bank to reiterate that “further OCR increases appear likely at upcoming meetings” given that the OCR “remains well within the bank’s neutral range estimate (2.20%-4.10%).”

Nonetheless, BBH expects the updated OCR track to “track below market pricing which limits NZD upside,” highlighting that “New Zealand inflation expectations are anchored around 2%” while “rising unemployment points to excess labor supply.”

If RBNZ policymakers signal that another hike in October is more likely than not or raise their projected terminal OCR from around 3.28%, the NZD could stage a solid recovery against the US Dollar (USD). Westpac says markets could then price hikes in both October and December, taking the OCR toward 3.25% by year-end.

On the other hand, if the Kiwi central bank flips to wait-and-see mode to assess the economy after the recent streak of rate rises, markets could scale back expectations for another lift-off in October. That would exert additional downside pressure on the NZD/USD pair.

With a 25 bps rate hike largely priced in, the surprise may come from the RBNZs guidance on the next two meetings.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for NZD/USD:

“The pair has cracked the 21-day simple moving average (SMA) near 0.5900, while holding a bullish near-term bias as it remains above the 50-, 100- and 200-day simple moving averages (SMAs), clustered between roughly 0.5823 and 0.5849. The Relative Strength Index (14) near 50 hints at consolidative momentum after the recent advance. ”

“On the downside, initial support emerges at a broader demand zone defined by the 100- and 200-day SMAs at 0.5845–0.5847, with the 50-day SMA at 0.5819 reinforcing the medium-term floor if a deeper pullback unfolds. Conversely, if NZD/USD resumes its recent uptrend, the first critical resistance is aligned at the 12-week high of 0.5989, above which the 0.6050 psychological level will come into play.”