What To Expect From Tomorrow’s RBNZ Policy Meeting

By Orbex

There is a pretty solid consensus that the RBNZ will move to raise rates once again by 25 basis points at their next meeting. This could weigh a bit on the stock market, but the currency could continue getting stronger. Global interest in commodity currencies has been increasing with a general risk-on sentiment.

In fact, the escalating situation between Russia and Ukraine might also be a contributing factor for better performance in the NZD. Investors are looking to get away from risk areas, and the Kiwi economy is virtually disconnected from the parties any potential conflict could affect. With the economic situation in China improving, exports from New Zealand could continue to thrive.

It’s all about the differences

Inflation in New Zealand has rocketed to 5.9% annually. That’s the highest it’s been since the late eighties. However, compared to other countries, particularly the US, it isn’t so bad. That makes the NZD, with relatively higher interest rates, a better option to park investments in.

Meanwhile, the expectation for New Zealand’s largest trade partner, Australia, is to keep rates low for at least a while longer. This increasing gap in interest rates could help fuel capital flows across the Tasman Sea. In turn, this would support the smaller country’s currency.

External versus internal factors

The median survey of economists conducted by the RBNZ for their quarterly report saw inflation staying above target for the rest of the year, finishing out at 4.4%. That is an improvement over the current situation. But it’s far from claims of inflation being “temporary”. It also suggests that economists (and the investors they advise) likely expect the impact of increased rates to not really control inflation for a long time.

Part of that is due to factors beyond the RBNZ’s control. Some of the inflation in New Zealand is due to increasing house prices. And higher interest rates might slow down the exponential cost of housing and construction. Nonetheless, supply chain issues, particularly for imported consumer goods, are dependent on the conditions outside of the country.

Where will rates go in the meantime?

However, a sharp increase in the OCR could help drive the currency higher. A stronger Kiwi dollar would help control inflationary pressures. But that would likely hurt exporters, and then the economy as a whole. This puts the RBNZ in a somewhat tight spot, like most central banks, being cautious to raise rates too fast out of fear of hurting the economy.

As usual, the market might be getting ahead of itself, and pricing in a too aggressive of a move from the RBNZ. So, we might want to pay attention to potential post-rate comments that suggest a less hawkish tone than anticipated.

That might come down to the issue around bondholding since the bank should make a decision on what to do with the assets it has purchased. It appears the market is expecting the RBNZ to start outright selling bonds, instead of just letting them roll off as they mature. Selling bonds would likely be more hawkish than letting them mature.

Article by Orbex

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