Assessing the Reserve Bank of New Zealand's Policy Outlook

The Official Cash Rate (OCR) in New Zealand stands at 5.5%, according to the latest data, aligning with the GSe/Bloomberg Consensus. As the Reserve Bank of New Zealand (RBNZ) approaches its February meeting today at 12pm, there is a sense of anticipation and caution among market participants due to limited communications from the central bank since November. 

RBNZ Rate Decision

 Source: Finlogix CalendarIn the absence of direct policy outlook statements, Governor Orr delivered brief remarks last week. Notably, he highlighted those measures of core inflation had eased. However, he emphasized the importance of addressing persistent inflation pressures in the domestic economy to achieve the 2 percent inflation target. The governor acknowledged that the evolution of factors such as capacity pressures and inflation expectations would influence the duration of these pressures.

The recent modification to the RBNZ Remit, solely focusing on inflation, was seen as a positive step to anchor inflation expectations. However, Governor Orr clarified that this adjustment did not signify a significant change in the Monetary Policy Committee's (MPC) task. This lack of explicit guidance has led to speculation and uncertainty in the market.

Analysing the recent economic data, there is a broad sense of encouragement regarding the rebalancing of the economy toward a more sustainable demand/supply equilibrium. Inflation is believed to be on track to return to the target by the second half of 2024. However, challenges persist, with wages growth and non-tradables inflation still exceeding the target. This raises questions about the appropriateness of signalling a readiness to cut rates at this juncture.

Despite positive economic indicators, it is suggested that it is premature for the RBNZ to signal a rate cut. Instead, the central bank is likely to maintain a broadly unchanged OCR track and some form of tightening bias in the upcoming Monetary Policy Statement (MPS). This aligns with the guidance provided in November, where the RBNZ expressed sensitivity to possible upside surprises to inflation due to the elevated starting point.

Looking ahead, the base case scenario suggests that the RBNZ will keep rates on hold throughout the first half of 2024. The first cut is anticipated to occur in August 2024. This projection is subject to change based on evolving economic conditions and inflationary pressures. The market will be closely watching for any hints or adjustments in the RBNZ's stance during Governor Orr's press conference scheduled after the release of the MPS.

Governor Orr is also expected to speak at a Business Canterbury Lunch on Friday, including a Q&A session. However, it is noteworthy that the event will not be live-streamed, potentially leaving market participants to rely on subsequent reports for insights into the governor's views on the economy and monetary policy. As the February meeting approaches, market participants remain vigilant, prepared for potential surprises given the limited communication from the RBNZ in recent months.

Insights Inspired by MUFG: Credit to Their Analysis for Shaping Some Aspects of This Text

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